Descending into farce: Brown’s soft guarantee for all UK deposits
Since my piece below on systemic risk, PM Brown said in Paris that the Government would do whatever it had to in order to protect sterling deposits in British banks. Now Parliament knows… Following the logic I spelt out in that piece, if you believe the British Government can and will prevent loss of any uninsured deposits in UK banks, the implication is that you should rate banks as safer than money market funds since the latter also invest in commercial paper which is not guranteed and rises in risk as lending to companies dries up. But you might just want to wait to see what Parliament thinks before you trust this particular promise made on your behalf without debate.
How does this extraordinary if ambiguous statement differ from the Irish Government’s specific promise to guarantee all deposits (including sterling deposits placed by UK citizens)? One difference is that the UK might just be able to provide protection against multiple failures whereas the idea that Ireland can guarantee unlimited deposits in a foreign currency is a joke. Even the idea it can guarantee deposits in euros (whose issue it cannot control) is ludicrous. It would be laughable except that the possibility of collapse of either of our two experimental monetary unions, European and the looser dollar union, adds to the risks to the global economy of the banking crisis. Perhaps ‘descent into farce’ is another version of ‘staring into the abyss’ what has often proved to be the trigger for that form of enlightened self-interest that encourages participants in a market system to place bets on the survival of the system. If it is, we can thank the Irish.