Northern Rock and the Failures of Interventionist Economic Policy

The big news in the financial sector right now is the British Government’s plan to nationalize Northern Rock Bank (NHRKF.PK), a move that was mostly symbolic in my opinion as the bank was effectively nationalized back in September. The Northern Rock situation is a symptom of the failure of “interventionist economic policy”, where governments and central banks try to protect companies, investors and even the public from the consequences of bad decisions, economic cycles, etc. While the goals are of “interventionist economic policy” are admirable the cost of these actions are often more detrimental than the disease; Northern Rock’s troubles are a result of the Fed’s cheap money policy designed to ward off recession in the U.S.

The British Government tried to save depositors, protect the larger economy and their banking system and have instead shackled the tax payer with a liability that stands at $50 Billion and counting. As this crisis unfolds, I suspect history will look back and determine that the cost of “saving” Northern Rock was actually greater than simply letting it fail.

Somewhere along the line it was decided that we could have our capitalist cake and eat it too, that we could play the free market game and conveniently intervene whenever the possibility of negative consequences arose. Unfortunately not only does intervention reward bad behavior, but the costs of intervention are oftentimes too high compared to the cost of simply accepting that failure is part of capitalism. We can’t play the free market game only when it’s convenient, and then go running to the politicians for bailouts.

As a London Telegraph columnist said this past September when the scandal first broke, “If we take away risk, than capitalism is finished”; there value in letting the markets do their job and the costs of intervention (especially when it’s politically motivated) are greater than simply allowing the adverse event to happen.

Finally let’s not pretend that the Northern Rock situation is something that is “Unique” to Britain, the “investments” (bailouts by another name) made by sovereign wealth funds into banks in the U.S. and Europe are the same exact thing. The only difference is that the solution is more free market based and isn’t likely to saddle tax payers with billions in debt.

Disclosure: at the time of publishing the author didn’t own a position in Northern Rock.