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February 19, 2008
Lemon socialism in banking
Legislation to nationalize Northern Rock Plc cleared all its stages in the lower chamber of the U.K. Parliament. Earlier the UK government rejected two private offers to take over the bank, one of them from Richard Branson’s Virgin Group. Has anybody in the UK ever heard of the Continental Illinois Bank case? The Fed and FDIC panicked when the bank failed in 1984 and no other bank accepted the FDIC’s offered payment to take over the bank and assume the obligation to repay its depositors. Rather than liquidate the bank and give the uninsured depositors a haircut, the FDIC nationalized it. It was the “too big to fail doctrine” at its worst. After a few years they reprivatized the bank – but recovered only a fraction of the capital they’d pumped in to make it solvent again. The FDIC ended up with a recorded loss of $1.1 billion. Posted by Lawrence H. White at 09:44 PM in Economics
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The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it. -Adam Smith
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