Anatole Kaletsky
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"Once a run gets started it is rational for other people to join in.”
Those may sound like the words of an irresponsible scaremonger, but they were spoken by Mervyn King, the Governor of the Bank of England, commenting on the BBC about the bank run at Northern Rock. After what Alistair Darling said in Parliament yesterday - or rather what he failed to say - a run on the entire British banking system is, almost incredibly, the danger that we all face today.
The bank run this time does not consist of people patiently queueing outside branches to draw out their thousands, but of financial institutions and corporate treasuries calling back overnight deposits worth tens of billions of pounds. The basic dynamics, however, are the same today as they were a year ago. And now, as then, the only way to reverse the financial vicious circle will be for the Government to put its full faith and credit behind every penny deposited in every British bank.
The reason why strong - and immediate - government action is needed in a banking crisis is very simple, even if neither the British nor the US treasuries appear to understand it. Banking is always based on faith, because no bank ever has enough ready money to repay all its deposits and debts - and the public’s confidence in any nation’s banks depends ultimately on faith that the Government will stand behind them. Only the Government can ultimately guarantee a banking system, because the Government has the unique ability to print the money with which debts are repaid.
Normally it is enough for the Government’s support to be implicit. It is even desirable for financial hygiene if some minor banks occasionally fail. But when money is flooding out of the entire banking system, then the
Government has to stand foursquare behind it and make it absolutely explicit that no depositor or creditor of any bank will lose a penny under any circumstances - regardless of anything that might happen to the bank in question or to the economy as a whole.
This is what the Irish Government stated last week and what the Germans and many other European governments promised, in one form or another, over the weekend. It is also, ironically, the reassurance that Mr Darling offered temporarily a year ago after the failure of Northern Rock.
Yesterday, however, Mr Darling specifically refused to match the Germans’ weekend assurance. To say that the Government will do “whatever is necessary to ensure stability of the financial system” is no comfort to an individual saver - or an inter-bank depositor or corporate treasurer - who is not concerned about the system’s stability but only about repayment of his own money, with interest and on time.
Bizarrely, Mr Darling seemed to think that he could bolster confidence for British banks by arguing that the German bank guarantees were not really as firm as they seemed - and then pointedly refusing to offer even such half-hearted guarantees himself. However, the impression he conveyed was not of confidence but of chaos. Yesterday’s may only have been a holding statement while the Treasury works out what to do next, but talk of recapitalising the banks, tightening regulation, changing accountancy rules or international cooperation are on completely the wrong timescale.
The flight of wholesale deposits from Britain’s banking system, like the flight of retail deposits from Northern Rock a year ago, must be stopped in days or hours, not months or weeks. The only way to do that is for the Government to offer a temporary guarantee on all liabilities of all British banks - with no qualifications, no ifs and no buts. And the time to do that is fast running out.

Anatole Kaletsky writes for The Times Comment pages on Thursdays. One of the country's leading commentators on economics, he was formerly Economics Editor and is now an Associate Editor of The Times. He has won many awards for his financial and political journalism. Before joining The Times, he worked for 12 years on the Financial Times
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I have been reading Anatoles articles for some years now. His writing allows informed readers, who are not economists, a route into the world of economics. It is ironic that the worlds central banks have today moved towards a solution he has been suggesting over the last few days.
Matthew Harvey, Market Drayton, UK
They wont do it and then theyll have to nationalise half of the UK banks.
Rob, London,
Fractional reserve banking is fraud.
See "What has government done to our money?"
by Murray Rothbard
Philip, Nebraska, USA
Boy oh boy, are Barclays glad they lost out to RBS!
George Townsend, Elk Grove, USA
I will remind you our Queen has done her fair share of signing of agreements with foreign governments (example Lisbon Treaty) that take away our rights and liberties. I am Royalist but not at any cost.
R McAuley, Antrim, UK
Amazing to recall now how blind the ECB and BoE were to the danger signals that were flashing red a year ago to anyone who was looking. Even worse were bank directors insisting they were adequately capitalised to cope with impending losses and refusing to change the bonus structure causing the mess.
Robert Cookson, Bow Brickhill, UK
Anatole, it is the ability of the government to "print money to cover the debts" that got us into this mess in the first place. What we need is a return to the dicipline of the Gold Standard and ~100% reserve banking, not more funny money and debt. Your advice would only lead to hype-inflation.
Chris, Bristol,
"...make it absolutely explicit that no depositor or creditor of any bank will lose a penny under any circumstances..."
There obviously isn't enough money to repay all the bank accounts. So the government can only inflate the currency until all debts shrink, and everyone with savings loses heavily.
Tom Welsh, Basingstoke, England,
It seems ironic that Tony from London complains about the role of "marxist labour" in ruining the banking system, and yet seems to be in favour of massive state intervention to prop up the banking system. Isn't that a bit too... socialist?
Paul Levy, Lausanne, Switzerland
I left school in 1955 and was trained to show that a Balance Sheet, at a certain point in time, should show ' a true & fair view'.
Maybe I am old fashioned and / or out of date ... but how can our regulators allow ' off balance sheet liabilities' ... what a mockery of accountancy ... as I know it !
Michael H. Harrison, Cleckheaton, England
This is a no brainer. One doesn't need to be a highly paid banker, a politician or a highly qualified economist to see what is happening. Confidence is the issue here so give confidence. Guarantee all savings. It won't cost a penny and it will actually save a lot in taxpayer bailouts. Why delay?
Paul Owen, Birmingham, UK
Marxist labour has delivered us into failure once again.
Is it not the true darling was a member of a far left group seeking to destroy capitalism?
Is it not the case that marxist labour has done just about everything it could do to bring abnout the runination of this country and our Queen?
Tony, london , UK
UK plc needs to guarantee all savings, however I object to the likes of Barclays demanding this. They have been instrumental in downgrading UK banking services, closing branches, now refusing to lend to other banks, withdrawing credit to UK business and want tax payers to bail them out! Priceless!
Kirk Langley, Addlestone,
the big policy failure this time (will with hindsight) be the lack of international policy co-operation to solve this international financial crisis. when capital is globally mobile, patching up one national banking sector isn't sufficient. it's prisoners dilema, but with only a lose-lose outcome.
stephen, china, china
I'm the first to blame the Government but it's the idiots on the stock market who are responsible for this price run and they are in-effect blackmailing the country. The LSE needs level heads, not spoilt kids and rumour mongers who can't get their own way.
Mark B, Hull,
I thought all EU banks had to act in concert to avert this crisis Does that mean all offering unlimited domestic guarantees or all acting in unison with a co-ordinated EU wide external policy?
Ben, London, England
If Gordon Brown was a Judge and had two wigs in his Chambers he would never get into Court! He must act immediately to restore universal confidence for all investors, particularly the large investment orgnisations, so as to stop further pressure on the banking system.
Charles Chruszcz, Manchester, UK
I agree that Mr Darling's speech was only noteworthy in that he didn't have anything much to say. I think it's time we had a vote of no-confidence in the Government and got rid of them for good. Long term, we all need to save more and spend less.
Peter, Singapore,
Brown, I suspect, does not have the ability to make a decisive move. Hence Mandelson as a scapegoat.
"What's happening in Brusells then Peter?" he asks. Haven't got a clue Prime Minister. They don't talk to us Brits as you found out last weekend."
"But Peter, I thought....................... Oh!"
A.M. Williams, Stafford,
Just more dithering from this government, they couldn't make a decision if their life depended on it . It is obvious that the government must issue the same guarantee as the other countries or there will be a run on our banks. Darling should just get on and do it, before he does any more damage.
Dave, Bristol, uk