Bayes And Brit Banks

The Brit MSM is telling Brit savers they’re wrong to pull their money out of a troubled bank, since it’s been “guaranteed” by Brown’s government. In the immortal words of John Bolton, they have to be kidding.

Here’s the London Daily Telegraph:

It would be wrong to queue today

The sight of queues snaking along streets yesterday as people waited to withdraw money from Northern Rock was clearly too much for the Prime Minister.

For obviously political reasons, the Bank of England promised to guarantee deposits in Northern Rock, and to provide the same facility for other such institutions…

A deep breath needs to be taken all round, and the banks themselves need to start lending to each other again before an entirely unnecessary panic is caused by their illogical behaviour. Also the public, safe in these ill-advised Bank guarantees, would be advised not to queue today, and foster further irrational panic.

It’s true pulling your money out of a bank may cause it to collapse, if many others do so at the same time. But to hold back on the basis of a government pledge is also risky. All governments lie, this one habitually – for example insisting against the facts that the repackaged EU constitution is nothing of the sort.

So would it be rational for Brits to pull their lifetime savings out of Northern Rock?

Either consciously or unconsciously they’ll use Bayes’ theorem, weighting the risk of an event by its cost to them, and comparing the result with the alternatives (spreading it across other banks, or keeping it in cash in safe deposit).

Consider first the risk:

– You can probably rely on existing guarantees to savers which pay a maximum of £31,700 if a bank goes bust.

– You can only possibly rely on government assurances, since it won’t get re-elected if millions lose most of their savings. But such promises could easily be dropped if more important crises develop, and that’s quite likely because:

British citizens are the most personally indebted in the world and total UK personal debt, including mortgages, has been estimated at £1.3trillion.

That means the UK economy will tank sometime soon, bringing great pain to all.

So I’d guess your risk is zero if you have less than £31,700 deposited, and 50% for any amount above that.

For a couple close to retirement who have saved £250,000, what’s the cost of a 50% chance of losing £218,300?

Assume they plan on using their savings to eke out a pension of £20,000 a year by investing it in an annuity. At 65, this would yield £17,130, giving a total pension of £37,130.

Whereas if they get an annuity only on their safe £31,700 and a 50% risk-reduced balance (£109,150), the annuity pays just £9,651, making their expected pension £29,651.

So trusting the Brit government risks losing 20% of their pension, and that makes it very rational to pull their money out.

From a macro perspective, this means the UK economy is now quite unstable, because older folks who distrust the current government (I’m guessing this is the majority of savers) will stage runs on any banks that look somewhat unsafe.

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