Monday, September 17, 2007

How Fragile We Are

. Monday, September 17, 2007

One might have hoped that after the weekend pause saner heads might prevail. But, the run on Northern Rock continues into the new week. The Telegraph had some interesting coverage over the weekend, providing a glimpse of the underlying mentality of the "panickers": As one man standing in line said, "It's my life savings," he said. "I think the risk is pretty low but you never know." Right, when a long line forms at your bank, the safe thing to do is join.

What I find most puzzling is that the amounts that people claim to have deposited with Northern Rock are invariably less than the maximum deposit the British government insures. Hence, even if NR is insolvent,depositors don't lose. We are not talking about huge investments being pulled from uninsured hedge funds, after all, but thousands of pounds being withdrawn from fully-insured institution. At worst depositors are moderately inconvenienced (become illiquid until the government check arrives). So, does this rush to withdraw mean that they don't trust the British state to make good on its promises either?

I guess this shows how rapidly people cease acting rationally. Especially when financial institutions that hold their life savings seem about to fail. Makes you wonder how bad things can get if we lose collective confidence in those parts of the financial system that are not federally insured. As Hayek once said, in commenting upon the 1929 crash and its ugly aftermath, "we did not know just how fragile our society was."


Andy P said...

Interesting and I agree.

How Fragile We Are
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