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Leading article

There may be trouble ahead

Wednesday, 19th September 2007

Extraordinary measures are sometimes necessary to quell the madness of crowds. When Diana, Princess of Wales’s mourners threatened to vent their angry grief on the institution of monarchy itself, it became necessary for the Queen to speak directly to her people.

The second option was for the Chancellor, Alistair Darling — in the notable but characteristic absence of the Prime Minister — to speak directly to his people, and announce a cast-iron guarantee of deposits in Northern Rock. After a day of dithering that is what he proceeded to do, and in a limited sense it did the trick: queues evaporated, shares rallied, the Prime Minister came out of hiding to commend his own economic record; as far as Downing Street was concerned, it was back to business as usual.

Clearly it is not going to be business as usual in the markets for many months to come, however. The run on Northern Rock will go down as a dark moment in banking history, and much dust needs to settle before we can make a comprehensive analysis of its financial and psychological causes and the government’s reaction. What we cannot say, at this juncture, is that Darling should not have issued his guarantee at the moment that he did so.

In the hours beforehand, share prices of other mortgage lenders such as Alliance & Leicester had started to tumble: if the Chancellor had not given clarity to earlier vague assurances that ‘your money is safe’, other smaller banks would certainly have attracted queues of distressed depositors on Tuesday morning. The worst nightmare of central bankers — of a contagion of fear leading to ‘systemic’ failure — was a live possibility; so was the worse nightmare of British politicians — of a total collapse of public belief in the government’s economic competence. The Chancellor had to act.

But it is pertinent to ask whether other actions could have been taken earlier, and by whom, to avert this flirtation with cataclysm. We should also ask, as Charles Moore does on page 10, whether the situation was exacerbated by the confused structure created by Gordon Brown in 1997, leaving the Bank of England as lender of last resort but passing the role of bank regulator to the Financial Services Authority, while reserving a heavy hand for the Treasury in key decisions.

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A child of our time

From the economic and psychological bedlam of the global downturn has emerged a particularly dangerous false dichotomy: namely, that there is somehow a choice for ministers over the next few years between economic reconstruction and the repair of Britain’s broken society, and that the government (whether Labour or Conservative) must prioritise the former at the expense of the latter.

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The Spectator's Notes

Charles Moore

‘A money-financed tax cut is essentially equivalent to Milton Friedman’s famous “helicopter drop” of money.’ So said Ben Bernanke, now the chairman of the Fed, in a speech about how to ward off the ‘extremely small’ chance of deflation, which he delivered in 2002.