Analysis of the Northern Rock debacle

by Evan Davis

A group of experienced climbers decide to enjoy a party on the top of a mountain. It seems quite sunny, so they pack a few drinks and as they reach the top, they crack open some bottles and blithely dismiss the warnings of impending storms that come from the mountain rescue people patrolling the area.

The climbers are very drunk when the storms eventually hit, but pretty soon they sober up as they realise they can't get down the mountain. So they call for the rescue helicopter to come and and get them and their picnic boxes.

Instead of sending a helicopter straight away, the mountain rescue team tells them to dump their picnic stuff and to try to make their way down the mountain alone. The rescue chief thinks they can still get down safely, and anyway he thinks it's only right to let them learn their lesson.

But he's wrong. They get into a bit of trouble, one is injured (although no-one dies). Once he sees there is trouble, the chief does relent and sends the helicopter for them.

This is not a very unfair characterisation of the situation between the Bank and the banks.

And who at the end of this tale should get punished? The experienced climbers? Or the boss of mountain rescue team?

At the moment, there is a keen desire for someone to blame, and the spotlight is falling on Mervyn King.

The case against him is pretty clear. He could have taken actions that would have avoided the Northern Rock debacle. He could have pumped cash into the banking system that would have obviated the need for Northern Rock to humiliate itself and come and get some on its own, creating a bank run. But he didn't.

Mr King would have had to pump quite a bit into the system, because to give enough to Northern Rock would have required giving a lot to many banks who didn't need it so badly. And if he had just injected a little cash, it wouldn't have found its way to Northern Rock.

But in the tripartite division of responsibilities, Mervyn King was the only one with the rescue helicopter, and he chose to use it later than many others wanted.

And as if to prove he was wrong, he made the U-turn yesterday, and did what everyone else had wanted all along.

The case in the defence of Mervyn King is pretty strong too, however.

It's quite simple. Rescuing the banks by validating their reckless behaviour has a cost. It encourages them to be reckless in future and it strengthens the relative competitive position of mis-managed banks over well-managed ones.

In addition, the Bank maintains that any solvent bank can get cash, just as long as they are willing to pay for it at a penalty interest rate. If they don't want cash, it's because they are too concerned with preserving their profits to borrow it.

In addition, Mr King has always recognised that there is a trade-off between letting the banks suffer from their actions, and helping the economy. He has always been clear, you can change your mind about where we are on that trade-off without performing a U-turn. He changed his mind this week.

For many, the subtleties of the argument are irrelevant. There has been a problem, someone should resign. It would be undoubtedly convenient in the city and in Westminster if it was Mervyn King.

But whatever the case on both sides, and whether or not Mr King keeps his job (I suspect he will, incidentally, but may not get his term in office renewed) the real questions after this affair are not so much about the handling of it in the past three weeks, but about the handling of it in the past three years.

See also

• Panic in the control room