Dumb economic question

[fivemack]

It seems that the current Something To Do about the credit crunch is to provide Government backing of private bank deposits without limit - Ireland, Greece, and now Germany, and a punditry belief that once Germany has gone the insurance will be extended across the EU.

How does this help, when the immediate consequence of the credit crunch that keeps coming up is an inability of banks to issue short-term business loans, with a secondary concern about businesses losing float kept in their accounts with failing banks and being obliged to close.

It doesn't make the banks any more solvent, it just makes their insolvency less visible, and means that in the event of the bank running out of money I get repaid out of the National Debt, which I then presumably get to repay out of raised taxes over the next half-century.

Comments

[fivemack.livejournal.com]

The relevant factor here is surely not 'private individuals', but 'private individuals with more than £35000 in a single bank'; there are at least three banks and most people with more than 35k in savings are reasonably risk-averse and financially competent, so you're dealing (in the context of a crisis caused by peoples' increased propensity to refrain from saving and live off credit - mortgage withdrawal rates only went negative this quarter, net saving is now tiny-but-positive rather than actually negative) with the relatively small set of people with more than £100k in savings in a bank.

I suppose there is a 'but what if Abbey go bust during the two-hour period that my house deposit is passing through them' worry, but insuring sums deposited for less than 7 days would handle that case.

You're creating a strong incentive to sell shares in anything that looks remotely risky and put the money into Halifax six-month bonds paying 7%, which is nice for Halifax until April but seems somehow sub-optimal for every other public company.

[arnhem.livejournal.com]

It's possible (I don't know, but I suspect) that most people with more than 35k in savings are retired. They've got them by having a pension. Admittedly, that probably filters out the really risk-seeking types, but I think it's unwise to assume that they'll all have done the most sensible/competent/risk-averse thing with any lump sums.

What I think I'm trying to say is that you may find that there's quite a lot of people with >35k who feel very vulnerable indeed (as they've got comparatively poor or no earning potential, and don't know how long they've got to make the lump sum last).