This letter by Tim Congdon is worth reading.
The key para is:
The second mistake is to assume that, whenever a sum of money is mentioned, an identical flow of resources is implied. In due course the allocation of money to a task does indeed often result in a flow of resources, but not always. Loans can be extended to acquire existing capital assets and repaid from the sale of those assets, and the only resources involved are the time and energies of a handful of bankers, lawyers, surveyors and so on.
Basically he's saying that replacing commercial loans with ones from the BoE and treasury is not a transfer of resources, and may not cost anything. This is clearly right as long as the assets are not that bad quality, as NR insists. I guess it is that any buyer like Olivant or VM are likely to make an offer based on a fairly pessimistic valuation of these assets. It stands to reason then, at least in my mind that the BoE might as well continue to provide capital to NR for at least a couple of years at which point the real quality of the assets should be much more apparent. To sell the bank in a panic now will surely get the wrong price. As long as the existing shares are trading the owners have the option of hanging on or selling out now and at least getting a little for their holding.
It is far from obvious to me why the 'do nothing more' option is not acceptable. There are mumblings about state aid, but a loan at a commercial rate, or a guarantee of of a loan from someone else, is not a subsidy, surely? Congdon says that the BoE loans are at a penal rate. I guess that the governments unseemly hurry to get shot of NR might mean that they know something that we don't - that the credit crunch is going to get much worse, and that we are still heading for that Minsky Moment that George Magnus keeps writing in the FT about.
I wonder if it would be better banks were required to buy deposit protection insurance commercially. I just feel that it would have been much less likely for NR to implode as it did if a commercial insurer was looking at the risks that it was running. Obviously insuring credit is a dangerous business as MBIA and Ambac have proved, but the political fallout would have been much less severe if it hadn't been the BoE / FSA / Treasury which had screwed up.
