Friday, September 14, 2007

Bank run


Ladies and gentlemen, my first real-live run on a bank! I took this shot this morning of the bankbook-clutching queue outside Northern Rock, which ... actually, never mind the boring details. Suffice to say that this is category-A hysterical mob behaviour. Very sedate, neatly dressed, well-behaved and typically nicely-combed-silvery-haired-and-pensioned hysterical mob behaviour, but still. Just outside the frame there is a pair of bemused-looking cops watching to make sure that no-one did anything ... well, mobbish.

Quick! Start stashing all your cash in the mattress! That'll improve the economy and show those American subprime defaulters what-for!

Northern Rock shareholders, come over for a drink. I feel for you.

18 comments:

Tom Bozzo said...

Holy 1932! Does the UK not have a national deposit insurance scheme? (I couldn't tell from quick Googlation.)

Considering the prevalence of ARMs and the astonishing national average price, I wouldn't be surprised if the drinks ended up being on the US subprime defaulters.

On the plus side, you might face more reasonable prices such time as you're permanently employed, assuming you were to stay in this hemisphere.

Tom Bozzo said...

...to answer my own question, the Financial Services Comensation Scheme has a low level of 100% coverage -- two grand for deposits, the 90% for the next £33,000. So if you have £4,000 on deposit and losing £200 matters, one might try to get in line.

In the U.S. savings & loan crisis of the late-80s, there were some runs on state (as opposed to federally) regulated institutions that were covered by weaker state deposit insurance systems.

There's some boring details for you.

Xtin said...

Here's to a future of cheaper houses!

Xtin said...

And on the matter of boring details, as far as I understand it the Bank of England is currently acting as lender of last resort, which should guarantee that 100% of your deposit is recoverable. Also, BoE is not allowed to so act unless the bank whose ass it covers is still viable, so if people would just calm down for a minute ...

Tom Bozzo said...

The run certainly makes it harder for the BoE to do its job, assuming Northern Rock is otherwise viable. The lender-of-last-resort function isn't itself a 100% guarantee, since the BoE's analysts could decide that the bank wasn't creditworthy after all, and by refusing to extend further credit decide (in effect) that its affairs should be wound up.

The theoretical issue is that full insurance creates a "moral hazard" that depositors will sock their money in riskier institutions (which may offer higher deposit interest rates), the potential catch being that the FSCS design may be less effective at forestalling runs.

The über-nerd discussions of the market interventions by the Federal Reserve and ECB involve, in part, whether the authorities are putting lipstick on some pigs in order to prevent depositors and investors from getting too nervous about less-unsound institutions. And some private investors who have added capital to some of the wobblier but not yet failed U.S. mortgage lenders so far have been pretty badly burned.

(Sorry if this makes you regret blogging an economics-related topic.)

Xtin said...

Actually Tom, I was relying on you to weigh in!

I read all about the moral hazard issue on wikipedia, source of all Xtin's pseudo-ejamakation.

For some reason this phrase "moral hazard" is giving me a thrill.

MORAL HAZARD.

Zing!

dr. hypercube said...

2 quick hits:

Northern Rock made the noontime radio news over here (of course the noon report is an NPR/BBC collaboration, but we'll just ignore that fact for the moment).

I read an interesting piece a few weeks back, when the Fed was pumping money out to calm folks down - the point the writer was making was that what's being characterized as a liquidity crisis is in fact at the root an insolvency crisis. He said that sooner or later financial institutions would have to face into the fact that a lot of the packaged and re-packaged loans are worthless.

Tom Bozzo said...

Dr. H.: A good, if lengthy, post on the subject is here from Brad DeLong -- this may, in fact, be (or at least be closely related to) what you've read. The key quote is:

Ah. But, Grasshopper, liquidity problems are always problems of insolvency and uncertainty. As Larry Summers once said: "If, after all, everyone is certain that an institution is solvent, how can it have a liquidity problem?"

Xtin said...

An economics discussion is happening in the comments on my blog!

I'm so proud.

dr. hypercube said...

xtin - I live to serve/comment.

Tom - I'm a sometime reader of DeLong's blog. I haven't read him in a while, but I should start again - economics wonkery has got to be more enjoyable than reading about politics. I managed to find the blog post I was thinking of (I NEED the backtrack ability of a memex!). It's here: http://www.rgemonitor.com/blog/roubini/209779 Apologies for the long form, but I keep getting burned trying to embed links in Blogger comments. Here's a taste:

This is not just a liquidity crisis like in the 1998 LTCM episode. This is rather a liquidity crisis that signals a more fundamental debt, credit and insolvency crisis among many economic agents in the US and global economy. Liquidity runs can be resolved by the liquidity injections by a lender of last resort: in the cases of the liquidity crises of Mexico, Korea, Turkey, Brazil that international lender of last resort was the IMF; but in the insolvency crises of Russia, Argentina, and Ecudaor the provision of the liquidity by the lender of last resort – the IMF – only postponed the inevitable default and made the eventual crisis deeper and uglier. And provision of liquidity during an insolvency crisis causes moral hazard as it creates expectations of investors’ bailout. Thus, while the Fed and the ECB had no option today but to provide massive liquidity in the presence of a most severe liquidity crunch and run, they should not delude themselves that this liquidity injections can resolve the deep insolvency problems of many overstretched borrowers: households, financial institutions, corporates. Insolvency/credit crises lead to financial and economic distress – hard landing of economies – and cannot be resolved with liquidity injections by a lender of last resort.

Bolding above was mine (grin).

Scrivener said...

Wow, I never get this kind of erudite conversation in my comment boxes. Maybe I should post about economics sometime instead of just jabbering on about whatever it is I jabber on about. Maybe if I write a post about body modification and piercings I'll get a learned discussion of performativity? Because I don't think I could scrounge up enough knowledge to write an economics post that would foster discussion.

Xtin said...

Because I'm sure you noticed, Scriv, how much learnedness there was in my post about economics ...

pluvialis said...

The queue is even longer this morning! Lots of silver hair, yes. And shooting sticks and folding chairs.

Xtin said...

Folding chairs, really? Himmel.

Tom Bozzo said...

Dr. H.: I'm as curious as anyone as to whether the situation is bad as Roubini presents it. For the rest of you, Roubini's an NYU professor who's about as pessimistic as you get short of Jim Kunstler (who thinks 'peak energy' is so close that Xtin can look forward to planing voyages home by sailing ship, and smug urbanites shouldn't assume there'll be electricity for the lifts in high-rise buildings).

DeLong's main point is that among policy responses, having central banks add money to the system may help and is unlikely to hurt. I'm inclined to agree, insofar as the main problem seems to be less the amount of mortgages in or at risk of default, than that nobody really knows where those are and so the financial markets are failing. It's arguably George Akerlof's "lemons" paper come to life in a different form, to add to Xtin's economics pseudo-education via Wikipedia. If this is true, then the Fed, the BoE, and the ECB are doing G-d's work in making the markets.

A questionsble assertion in the Northern Rock story I saw this morning in the New York Times was that NR has limited exposure to 'subprime' lending. As my initial comment suggested, the UK looks like a huge subprime bomb waiting to go off, insofar as house prices are so far out of line with incomes (at the average, something like 7x incomes, vs. 4.5x for the still-bubbly U.S.) and there's such high exposure to ARMs relative to the U.S. I suppose we can all get out the popcorn and hope that we have worse things to worry about if it all goes kablooey.

dr. hypercube said...

Here's a concept - matryoshka lemons. I get the sense that starting from the paper in the financial markets and walking back to the sub-prime mortgages themselves, we have at least a couple layers of zest. There's the bundling that yields the end-product - aggregation that servers to obscure, and back at the end-user, I keep hearing stories about outright BS-ing to qualify folks for mortgages. How much of the making up of income/inflated appraisals/etc. was the policy of the mortgage company and how much was individual salespeople probably gives us another level of nesting...

Tom - thanks for putting Roubini on a spectrum - very useful. I don't mind pessimists - they are a heck of a lot more useful than optimists. If everything is going to be groovy forever, making policy ought to be a breeze.

Mrs. Coulter said...

My understanding from what I've read about what's going on in the UK is that the crisis there is less about subprime than the prevalence of ARMs. In the US, ARMs were heavily marketed to buyers with poor credit who didn't understand what they were getting into. But not all ARMs are shopped out to subprime borrowers--and even borrowers with good credit can get gobsmacked by an ARM reset if the refi market goes south or by the down-market if they suddenly need to sell. This is currently happening to some friends of ours who, up until now, have had very good credit. Unfortunately, they made a bad bet and are about to be in serious trouble unless they get seriously lucky in the next six weeks (a willing buyer for a house they desperately need to sell--if anyone knows someone looking to buy a lovely house in the DC burbs, please email me).

This crisis also is spreading to other areas with expensive real estate markets (I'm expecting the Russian banking system to explode any minute now--Moscow has some of the highest real estate prices in the world).

Tom Bozzo said...

Part of the problem is that credit ratings are largely backwards-looking, and people with good credit get that way mostly by not getting overextended. So "alt-A" loans -- like outsized ARMs made to people with hitherto good credit, such as Mrs. Coulter's friends or buyers of median-priced UK houses -- end up behaving a lot like subprime in the face of an adverse event (job loss, etc.) or just the factoid that financial responsibility and $4 will buy a latte but not do much for a big reset of an ARM payment.

Anyone who says London, NYC, Moscow, etc., are bubble-immune might take a look at the old stories from the peak of the Tokyo boom (of the one hectare of prime real estate would buy you Manhattan Island variety), then whistle past the graveyard...