They couldn’t run a credit-spree in a bank
Beyond the mind-numbing financial stats, the Northern Rock debacle gives an insight into the real state of politics and economics today.
Want to read spiked ad-free? Become a spiked supporter.
For a political leader to have a reputation as a dull, grey, ideas-free bank manager of a statesman is one thing. But what about being seen as a boring bank manager who cannot even manage the affairs of a bank? How do you maintain your hard-won reputation for safe-but-sensible government and financial prudence, when you are caught out trying to flog a bank in the middle of a credit and stock market crisis, and promising multi-billion pound support to anybody who will take it off your hands?
Welcome to the world of UK prime minister Gordon Brown in the midst of the Northern Rock banking debacle. Whether he can ever recover his authority from this mess remains to be seen – but few of the City gamblers would bet on it. His big appearance on national television this week, to issue formal congratulations to a retiring Blue Peter presenter, will not have filled anybody with confidence.
However it ends (and it is unlikely to end well), this business has already revealed much about the state of affairs in Britain today. If the problems at Northern Rock provide an insight into the unstable workings of the credit-fuelled economy, then the government’s response and the debate over whether to nationalise the bank shows the problems of politics and the state.
As analysed elsewhere on spiked, the current ‘credit crunch’ and problems in the UK markets stem from the way that capitalism here works in the twenty-first century (see The truth about the ‘credit crunch’, by Phil Mullan). The more ‘mature’ Western economies, such as the UK and the US, have been enabled to keep going by massive flows of credit, much of it capital generated by the increasingly productive economies of the East.
When problems in the American sub-prime mortgage sector last year caused a wave of panic, the big banks shut down lines of inter-bank credit. Northern Rock, a local building society-turned-bank, was a typical success story of the new UK economy, borrowing billions on the finance markets to back its aggressive mortgage lending policies as the housing market went through the roof. But when the big financial institutions turned off the tap, it was immediately in serious trouble, and the first run on a British bank in memory soon followed. The speed with which the Rock crumbled illustrated the fragility of the ‘boom’ in a British economy reliant on financial trickery, paper house prices, and handling other people’s money. The same instability is evident in the recent volatility of the share markets.
New Labour’s indecisive, even cowardly response to the Northern Rock crisis has confirmed that UK politics is more bankrupt than the economy. Despite the fact that we are supposed to live in a market economy, the government concluded (after damaging dilly-dallying) that it had to bail out Northern Rock somehow to sustain fragile confidence in the UK economy and especially the all-important finance sector. So, faced with those embarrassing pictures of pensioners queuing to get their cash back, it lent the bank billions and guaranteed its deposits while trying to work out a longer-term solution.
When, unsurprisingly, no private sector deal could be done, the prospect of nationalising Northern Rock loomed. But Brown’s government is terrified of being tarred with the brush of ‘Old Labour’-style state intervention in the economy. They seem as scared of being associated with nationalisation as being blamed for a banking collapse. Even in the middle of a real financial crisis, questions of political image and how-will-it-look-in-the-media were foremost in the New Labour mindset.
So instead of nationalisation, New Labour has come up with a ‘public-private’ solution to make the Rock attractive to buyers, whereby it would turn its loans into government-backed bonds and continue to guarantee the bank’s deposits. In the words of Liberal Democrat Vince Cable (the MP who coined the one about Brown being transformed from Stalin to Mr Bean), this deal would appear to have nationalised all the risks, while privatising the rewards.
But then, contrary to the impression often given, nationalisation and state intervention have generally been a good deal for capitalism. There is nothing necessarily ‘socialist’ or progressive about the state taking over parts of the economy. It has usually been done for the overall good of the system. Thus the big nationalisations in Britain after the Second World War – health, transport, energy, steel, etc – were of areas considered crucial for the smooth running of the capitalist economy as a whole, but which could not be entrusted to individual capitalists.
Nationalisation is now a boo word, but the rather moribund British economy remains at least as dependent on state support. Despite the myth that we in the UK and USA live under ‘neo-liberal’ regimes (a myth largely put about by the rump of the left) the state props up the market at every turn. In the UK, more than 40 per cent of the economy goes on state spending – and it is not all wasted on local council out-reach staff salaries (the alternative myth put about by the rump of the right). Rather, government expenditure provides crucial support for business through infrastructure, contracts, sustaining the workforce, regulation, etc – even though the latter can also hold back private enterprise.
Many of the big ex-nationalised industries and utilities that were privatised with loud fanfares over the past 20 years have quietly remained closely regulated and heavily subsidised by the state. Take, for example, Virgin Rail, headed by Richard Branson – Brown’s favourite celebrity capitalist and favourite to take advantage of the government’s Northern Rock sweeteners. Private Eye magazine recently reported that, in its winning franchise bids a decade ago, Virgin Rail had agreed to pay the state £130million (at 1996-7 prices) for the West Coast franchise while receiving just £6.9million subsidy to run services on the Cross Country franchise. In fact, the Eye revealed ‘West Coast got £221million subsidy and Cross Country £231million. Virgin’s franchises have involved risks – but only for taxpayers and passengers who continue to pay dearly.’
The government’s show of support for Northern Rock, however, looks slightly different. Instead of propping up such an important arm of the infrastructure as the railways, it is bailing out a provincial bank. And it is doing so far more publicly. Talk of the state’s intervention potentially costing the taxpayer more than £50billion is overblown – it ignores the fact that Northern Rock still has solid assets in the form of a good book of mortgages which are more prime than sub-; that, of course, is why the likes of Branson are interested in it. Nevertheless, the scale and seriousness of the government’s support for the bank has been hailed as unprecedented in the City.
This looks like state intervention designed not to shore up the national infrastructure so much as to support ethereal factors such as ‘confidence’ in the financial and housing markets. The changing character of state intervention reveals the more shallow, fragile state of modern Britain’s economic success, dependent on mood and borrowed money rather than solid industry and enterprise. That is part of the reason why the markets can seem to swoop up and down so rapidly, amid hysterical fears of ‘another Great Depression’, while the real economy continues to chug sluggishly along.
There are also clear limits to how far state intervention can rejuvenate the economy these days. This is not the 1930s, when Keynesian policies of state spending could boost Western capitalism into a new era of rapid growth. State spending and debt are already so high that the impact on any intervention is far more marginal. Just about all the central authorities of banking and government can do is to cut interest rates or inject more credit to keep things bumping along, while storing up the next round of problems.
It would be something at least if the Northern Rock debacle were to mark the end of the age of the statesman as bank manager, exposing as it does the bankruptcy of politics without Politics. We need a vision of where society and its economy is heading (other than from doom-mongers muttering ‘to hell in a handcart’), one that sees people as something more than shareholders, taxpayers and mortgage applicants.
While the economic debate remains restricted to whether or not to call a state-backed rescue plan for a bank nationalisation, and whether Branson or some private equity boys should reap the benefit, the question remains: what’s in it for the rest of us either way?
Mick Hume is editor-at-large of spiked.
Mick Hume noted the way stock markets go up and down but the economy is going nowhere and described New Labour’s policies as ‘not-so popular capitalism’. Phil Mullan revealed the truth about the ‘credit crunch’ and argued that economic cycles are not what they used to be. Or read more at spiked issue Economy.
This is what we're up against...
A media ecosystem dominated by a handful of billionaire owners, bad actors spreading disinformation online and the rich and powerful trying to stop us publishing stories. But we have you on our side. Supporters help to fund our journalism and those who choose All-access digital enjoy exclusive extras:
- Unlimited articles in our app and ad-free reading on all devices
- Exclusive newsletter and far fewer asks for support
- Full access to the Guardian Feast app
If you can, please support us on a monthly basis and make a big impact in support of open, independent journalism. Thank you.
To enquire about republishing spiked’s content, a right to reply or to request a correction, please contact the managing editor, Viv Regan.
Comments
Want to join the conversation?
Only spiked supporters and patrons, who donate regularly to us, can comment on our articles.