Don't worry, we'll bail you out

I was about to publish a post pointing out the message of Alistair Darling's guarantee to Northen Rock last night: that if you run a bank irresponsibly, it doesn't matter because the government will bail you out.

But Daniel Finkelstein got there first:

Guaranteeing deposits at Northern Rock and offering to do the same for other institutions may prevent meltdown, but there is a large moral hazard cost. Banks now know that they don't pay the full penalty if they find themselves at risk of running out of cash.

It will be interesting to see how long the Government's extraordinary guarantee lasts for. Too short and it won't work. Too long and the moral hazard cost becomes almost unbearable.