Northern Rock

This saga rumbles on.

A lot of people on high horses say that it is wrong for the government (i.e. the taxpayer) to guarantee savers' deposits.

It strikes me that the simplest and best solution would be to rejig our insolvency laws so that savers* get repaid first. Even if NR have to write down their loan book by a quarter, there'd still be plenty enough to cover savers' deposits. It just means that bondholders (more sophisticated investors, hedge funds, other banks and so on) take more of the loss on the chin.

So HM Treasury would put NR into liquidation, lend it £20 bn, allow the savers move their deposits elsewhere, and then pay itself the £20 bn back with interest** and lets the bondholders squabble over what's left. Shareholders would get nothing, presumably.

This would be more-or-less risk-free from the point of view of the government, the taxpayer and the savers***.

* Banks would have to make it clear whether a particular account or corporate bond actually counts as protected savings or whether it is an unprotected corporate bond.

** Debts incurred in the course of a liquidation get paid next.

*** Interestingly, this would make deposits at banks like NR that fund most of their activities with bonds/money markets safer than at other banks.

**** I have explained how credit and house-price bubbles can be prevented elsewhere on this blog.