Northern Rock and not-so-popular capitalism
It’s a bit rich to blame the bank’s crisis on ‘panicky’ savers and ‘greedy’ borrowers.
In Britain, as news cameras have homed in on people queuing outside branches of the Northern Rock bank to withdraw their cash, dramatic headlines shout that the first proper run on a UK bank for a century means the end of an economic era, ‘the last hurrah’ for our easy-credit economy and share/house price boom.
Yet at the same time, the voices of authority have urged us not to panic and assured everybody their savings are safe, while pundits blame silly punters for panicking unnecessarily. However, their message that Northern Rock is nothing to make a song and dance about (leave that to Howard and Co. on the Halifax ads…) did seem somewhat contradicted by the haste with which chancellor of the exchequer Alistair Darling stepped in to guarantee the bank’s funds – effectively nationalising Northern Rock.
So what are we to make of the mixed ‘Apocalypse now/Don’t panic’ messages? It is true that the UK economy is not about to collapse because of the difficulties facing one former building society based in Newcastle, or because of any of the other financial blips and trips experienced lately. But at the same time, this little crisis and the reactions to it do throw some light on wider problems of our age in the spheres of economics, politics and culture.
- The unreal economy
The Northern Rock crisis confirms the fragile, almost fictitious basis of our credit-fuelled financial economy.
The rise of Northern Rock in recent years, from local building society to major financial player, reflects the central role that the boom in paper house prices has played in the British economy. By borrowing money from wholesale money markets, and lending it out to credit-hungry house-buyers through an aggressive mortgage marketing strategy, Northern Rock rose into the FTSE 100 of top companies. Northern Rock’s sudden fall was not caused directly by its own actions, but was more of a distant side-effect of the summer convulsions in the American sub-prime mortgage market. When that crisis led the big financial institutions to put a hold on further inter-bank loans, Northern Rock ran into trouble.
This goes to show how, in a world of massive global flows of finance, where financial instruments become so complex that even the bankers might not know who owes what to whom, a problem in one financial sub-sector on one side of the Atlantic can have unpredictable repercussions across the sea. There is still no real shortage of liquidity in the system, and the credit-oiled economy will carry on. But the impact of the US sub-prime mortgage is now being felt way beyond what many expected. These things can raise bigger problems for an economy like Britain’s, heavily reliant on the finance sector for its success (see Shares go up and down – economy going nowhere, by Mick Hume).
With so much of Britain’s prosperity now dependent on intangible, soft, subjective factors such as ‘confidence’ in the financial and housing markets, rather than on the hard production of capital values, a minor crisis inevitably raises fears that things might spiral out of control. That is why, despite the Bank of England’s initial tough talk about letting the markets decide people’s fate, it was inevitable that the authorities would step in to support Northern Rock.
For reasons discussed before, we are probably not on the verge of a recession in the real economy. But the dependence of the UK (and US) economy on credit (often financed by the productive industries of the East) and government support, as confirmed by the Northern Rock episode, does give the lie to much of the hype about today’s ‘enterprise economy’. It also means that, despite all the warnings that ‘the party’s over’ in the City, the expansion of financial credit is here to stay – because the alternative is too dire for them to consider.
- Unpopular capitalism, rational ‘panic’
Those queuing all day to get their cash out of Northern Rock have been widely talked about in the most patronising and contemptuous terms. They have been accused of displaying a mob or herd mentality – or, as one psychologist from Newcastle University suggested, ‘everybody likes to join a queue!’ They are told that they are just being irrational, and just don’t understand how the sophisticated system works.
In fact, the popular response seems a pretty rational reaction to a financial crisis. We know that we live in an increasingly risk-averse culture, and ‘don’t panic’ is a regular theme of articles on spiked. But there is a difference between panicking unnecessarily about mobile phones or bird flu, and finding your real life savings caught up in the middle of the billion-pound bank crisis. Despite all the economic regulations and controls in place these days, there is still no such thing as an entirely risk-free market. The Northern Rock savers seem entirely sensible in seeking to limit their exposure to a troubled sector – don’t you think the big capitalists do the same? Indeed, the current problems could be seen as partly the consequence of a panicky herd reaction from the big lenders, who are unwilling to extend credit to solvent institutions like Northern Rock having got their fingers burnt by more reckless mortgage lenders elsewhere. By comparison, the ‘mob’ has shown remarkable restraint in not tearing the bank’s branches apart to get at their hard-earned money.
We might live in the age of TINA (There Is No Alternative), where the market is undisputed king. But that does not mean that people like or trust it. We are a long way from the talk of ‘popular capitalism’ and the ‘shareholding democracy’ during the Thatcherite 1980s. Today, even though many own shares and many more own property, capitalism is not so popular: it is widely associated with greed and scandal. The crises in the pensions and endowment sectors, among others, have taught people the hard way not to take financial promises at face value. Combine that with the wider crisis of authority afflicting every established institution in society, and you have a situation where the more savers are told they have nothing to worry about, the more suspicious they are likely to become. More power to their elbows.
- Bankrupt politics
There has been much industry talk of what the Northern Rock crisis reveals about the regulatory system that New Labour set up when it divided responsibility between the Bank of England and the Financial Services Authority. But of far wider import is what it shows about the division between economics and politics today.
Almost the first thing that then-chancellor Gordon Brown did after Tony Blair’s New Labour was elected in 1997 was to hive off control over UK interest rates to the bean-counters at the Bank of England. This signalled the effective removal of the economy from national political debate. For a century, the production and distribution of the nation’s wealth had been the central issue in political life, at the heart of the battle between left and right. But in the age of TINA, the national economy and finances had become increasingly viewed as technical matters.
Brown’s act finally formalised the division between politics and economics – at the same time as politicians became more and more like bank managers. The consequences have been seen in the past week when, although it was clear that the Treasury was pulling the strings behind the Bank of England’s actions, the government avoided responsibility for what was happening.
On the one hand, of course, the modern market economy in the UK cannot ultimately function without large-scale state intervention and support – as graphically demonstrated by Darling’s last-gasp promise effectively to nationalise Northern Rock. Yet the removal of the economy from politics means there is little or no political debate about these issues today. Indeed, the criticism of the authorities has been largely moralistic – like BBC Radio 4’s Thought for the Day on the ‘sins’ of the easy-credit regime – rather than a serious critical look at the reality of the economy.
So instead of democratic citizens debating the future of the economy and society, we are reduced to spectators obsessively watching the ups and downs of the shares and housing markets and the queues of punters asking for their money back. And while many have demonstrated their deep mistrust of capitalist finance, the only ‘alternative’ on offer is to take your savings out of Northern Rock and put them in some other bank – while wondering whether it is worth voting for any of the rival bank managers who head the political parties.
If there is a crisis, it does not start or stop at the doors of Northern Rock.
Mick Hume is editor-at-large of spiked.
Mick Hume and Daniel Ben-Ami discussed the recent fluctuations in the stock market and Mick Hume examined the ramifications of a 2p cut in income tax. James Woudhuysen said risk-aversion was behind the attack on mergers and on convergence. Daniel Ben-Ami said the economic impact of the 11 September attacks was blown out of proportion, and that contemporary attitudes to personal debt reveal a Scrooge-like distaste for popular consumption. Or read more at spiked issue Economy.