Let us pretend that you have money in the Northern Rock Building Society: what then is the rational course of action? According to the Chancellor, the emergency loan he has authorised to the beleaguered building society means that everyone can be reassured. It's not going out of business. That still leaves the question: what would you do? Well, the Financial Services Compensation Scheme that protects depositors only provides full compensation up to £2000 and ends £35000. This loan from the Bank of England isn't exactly free money either. The loan is secured on the Northern Rock's loan book, so it is effectively capped at £31.5bn, and that is assuming that none of the loans have not already been used for collateral elsewhere. It is also at a punitive rate of interest, so taking it up cuts deep into profitability, and Northern Rock will certainly have to take it up. So, in strictly rational terms the smart thing to do might be to get your money out, especially if you are well over the £33000 limit. In any case, Northern Rock customers are voting with feet, regardless of warm words from politicians, with £1bn withdrawn yesterday and more today, and the more is taken out, the more sensible it is to take your money out. Whatever happens Northern Rock is finished, facing either takeover or bankruptcy, probably the former. They ran a money market-based strategy, and, like so many similar, it worked just fine until the market changed. Using your business as a one-way bet is never a good idea.
I reckon that Northern Rock customers have got it right. The question is how correct are the Chancellor and the Bank of England on this one? They are being much less sympathetic than the the Fed or the ECB. This could turn out to be a mistake, especially if the Northern Rock collapses.