The Bear and the Rock – 2 different styles of rescue

A quick haggle, a visit to the lawyers, and a bank is bought and rescued over a week-end in New York. That’s the way to do it. It makes the UK’s attempted private sector rescue of Northern Rock look ham fisted, long winded and ultimately unsuccessful in comparison. The US authorities have once again acted decisively, with vigour and purpose, to prevent the banking collapse getting out of control.

This week we can expect further interest rate cuts in the US following on the 25pt reduction in the discount rate announced overnight. All this US activity is producing two main lines of criticism of the US authorities which we need to consider.

The first is the criticism that inflation is not under control, so cutting interest rates in premature and dangerous. It is difficult to hold both this view, and the view that the US is now in recession or is about to go into recession. The Fed clearly fears the forces that are restraining activity and cutting jobs more than it fears the inflationary forces that are evident and left over from the easy credit days that have now gone. Whilst I remain sceptical about the claim that the US is now in recession, it does seem that the impact of the housing crash and the drying up of credit means the threats to activity levels are more important than the threats of further price increases. I back the Fed’s judgement that their main enemy today is too little credit and activity, not too much.

The second common criticism is that by cutting so far so fast, and by using so much of its financial fire power at this stage, the Fed will have nothing left if it fails to work. This is an even more bizarre argument. It is saying if you use your umbrella in the wet and the wind today you may damage it, so it will not work next time. If you take that view everytime the weather’s bad what is the use of the umbrella? The Fed has good reason to suppose this is just the kind of crisis it has to respond to strongly by cutting interest rates and putting liquidity into markets. If they get it right they will make a relapse less likely. If they do not try with what they have there will be a very serious banking crisis.

Since last August I have been commenting on how different the approach of the US authorities is to the approach of the UK authorities. It has taken just four days to rescue the assets and what remains of the business of Bear Stearns. More than six months have passed and we are still a long way from finding a private sector rescuer for Northern Rock. The Treasury and the Bank now have much less flexibility to deal with any other financial catastrophe, because their balance sheets are stretched by taking on the Rock. Meanwhile the Fed is well on the way to laying off its problems with the Bear.

This entry was posted in Blog. Bookmark the permalink. Both comments and trackbacks are currently closed.

16 Comments

  1. Posted March 17, 2008 at 10:52 am | Permalink

    Like you, I was struck by how quickly and efficiently this was handled by the Americans. We don't here anyone saying that the JP Morgan deal was "never really on the table" unlike the excuses from the government about the Lloyds TSB/Northern Rock aborted take over. The Americans showed they can act decisively and do the deal. AD and the government, cannot and did not.

    If this was the private sector and AD had failed to do the deal, he might reasonably expect dismissal. He is fortunate indeed that ministerial responsibility has all but broken down in the UK.

  2. Posted March 17, 2008 at 11:54 am | Permalink

    The sheer speed at which Bear Stearns has sunk and been bought up should heap shame on the Government. I'm surprised to see the Conservatives remaining fairly quiet on this issue because Bear Stearns is a very good example of why struggling private firms do not need any government intervention whatsoever.
    http://lettersfromatory.wordpress.com

  3. APL
    Posted March 17, 2008 at 12:17 pm | Permalink

    JR: "A quick haggle, a visit to the lawyers, and a bank is bought and rescued over a week-end in New York. That’s the way to do it."

    Unfortunately, even if that was the correct way to do it, we in the UK are unable to do it that way. I agree that the UK government has dithered over a decision that should have been dealt with last September, but even if the government had been decisive, its decision would still have been 'second guessed' and possibly overruled by the European commission.

    Next time you speak to Kenneth Clarke, ask him if 'sharing sovereignty' is such a good idea when an emergency is to hand.

    When he advocated 'shared sovereignty' did he think it meant the british government should be unable to make a decision about the british economy in the sterling area.

  4. Posted March 17, 2008 at 2:21 pm | Permalink

    I often feel that it might have been better, and far quicker, to have allowed Lloyds TSB to take on the Rock in the first place, even if it would have led to the wholesale shedding of jobs. We learn now that they will be lost in any case.
    Such a course would have found an immediate private solution to Northern Rock's problems, and the costs of economic regeneration for the North-East would have been far, far less than the sums tha tax payers will lose by the end of the day!

  5. Posted March 17, 2008 at 3:04 pm | Permalink

    Why do you not talk about China? Surely that is more important than the Northner rock..

  6. mikestallard
    Posted March 17, 2008 at 7:28 pm | Permalink

    In Open Europe, to which I subscribe daily with enormous pleasure, it notes that the EU are now going to force AD to cut the staff back Northern Rock because the Danish Banks are complaining about unfair competition. If this is so, it means that the labour Voters in the North who are affected are going to be sacked anyway. Doesn't this make the entire operation electorally worthless for NuLab?
    You are so right about the flexibility and courage of a country that rules itself and makes its own decisions without all the paraphernalia of the ghastly EU.
    If only we were in the EFTA.

  7. Matthew Reynolds
    Posted March 17, 2008 at 7:47 pm | Permalink

    It is amazing a troubled bank is brought & sold over a weekend , taxes are slashed as part of a stimulus package and interest rates take a tumble . Compared to a bank nationalisation , higher taxes and tepid base rate cuts in the UK you have to admire our friends over the pond . Do the Anti- American left of the Labour Party really have the nerve to say that the US are wrong & that the British situation is great ? The American response has been superb as it has dealt with the problems very effectively unlike in the UK where Gordon Brown’s legacy to Alistair Darling means that the British response has been poor & that things could get still worse as a result .

  8. Posted March 17, 2008 at 7:54 pm | Permalink

    Good post John. I see the BBC reporting on this is studiously failing to do the appropriate comparing & contrasting.

  9. David Hannah
    Posted March 18, 2008 at 12:27 am | Permalink

    The Northern rock "rescue" looks set to fall foul of state aid regulations from our real government, the EU Commission. According to Anthony Woolich, competition partner at City law firm LG, "If the Government wants to remove Northern Rock from concerns about state aid it needs to make it uncompetitive".

    Of course the difference between the American and British responses to this crisis are profound; the former is a sovereign state, and the latter a vassal state.

  10. Steven_L
    Posted March 18, 2008 at 1:55 am | Permalink

    Well after a couple of bottles of beer I think I've cracked it – how about this for a novel solution:-

    Instead of not lending each other money, how about the big investment banks stop lending each others shares to short-sellers?

    There's probably a flaw somewhere.

  11. Posted March 18, 2008 at 4:21 am | Permalink

    The USA has a far bigger problem than the UK with 1 million homes foreclosed in 2007 and maybe 2 million in 2008. The UK's equivalent figure for 2007 was 27,000. They are really sh+++ing themselves over there, as house prices are more likely to fall and push more than half of all US homes into negative equity. That could lead to a total of 10,000,000 foreclosures.

    No excuse for Brown and Balls bumbling around with the Northern Rock, but hopefully the British equivalent problem will be chicken feed compared to that in the US.

  12. Matthew
    Posted March 18, 2008 at 10:37 am | Permalink

    Nothing about Northern Rock? The government seems to be handling it very well – much like a certain J.Redwood suggested, just without the legal fiction that it wasn't nationalised.
    http://www.ft.com/cms/s/0/085ba5e8-f472-11dc-aaad

    By the way JP Morgan haven't bought Bear Stearns yet and it's not a done deal: the share price is currently way over their offer price.

  13. Posted March 18, 2008 at 11:08 am | Permalink

    Amazingly, I heard the BBC complaining this morning that JP Morgan had engaged in a "smash and grab theft" of Bear Stearns and they will be making vast profits from this deal.

    Because, you know, we surely don't want banks making profits in times like these…..

  14. Paul K
    Posted March 18, 2008 at 1:09 pm | Permalink

    It used to happen that quickly here, as anyone who was around at the time of the Barings collapse will know.

    Barings went bust on Friday, the BoE worked all weekend, and a sale was negotiated by Monday. depositors never suffered.

  15. Posted March 18, 2008 at 2:22 pm | Permalink

    Steven the problem with your solution would be the same as closing down the national grid to ensure all electricity is made locally. Being able to draw on other reserves provides a cushion – except when the rules aren't equitable.

    European Socialist the answer is no. To Britain & British MPs the governance of Britain should be of more importance than that of China. A midway point applies to killings in Kosovo which are also, under, our occupation agreement, our responsibility. You will note that the death of 10 Tibetan protestors has received infinitely more coverage than the killing of 210 unarmed civilians at Dragodan, close to the site of the British HQ in Kosovo so perhaps you should not be quite so sure of the moral high ground.

  16. number 6
    Posted March 19, 2008 at 1:08 pm | Permalink

    Well, at least there should be another 2,000 more people against the EU now. Doubt it though, as the mainstream media (particularly the BBC) will never let on to the real axe behind the job losses.

One Trackback

  • […] the gulf of difference between the British and the American approaches to the bankin crises John Redwood in his post says: Since last August I have been commenting on how different the approach of the US authorities is to […]

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

    Promoted by David Edmonds on behalf of John Redwood both of 30 Rose Street Wokingham RG40 1XU

  • John’s Books

  • Email Alerts

    You can sign up to receive John's blog posts by e-mail by entering your e-mail address in the box below.

    Enter your email address:

    Delivered by FeedBurner

    The e-mail service is powered by Google's FeedBurner service. Your information is not shared.

  • Map of Visitors

    Locations of visitors to this page