There may be trouble ahead

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.

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. As the run on Northern Rock gathered momentum on Monday and panic-stricken depositors threatened to vent their anger on the government, there were only two possible responses. The more desirable option would have been to announce an immediate takeover of Northern Rock by a stronger bank which depositors would have accepted as undoubted. But that strategy carried risks of rejection even if it had been feasible at that moment — which it was not, negotiations with potential acquirers such as Lloyds TSB having ground to a halt a week earlier.

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.