northern rock | ukwatch.net

Groundhog Day for Boom and Bust

Ellie Keen — Sat, 19 Apr 2008 20:35:18 +0000

ANYONE looking at the recent Financial Services Authority report on its failures to supervise Northern Rock properly would be struck by how it neglects the systemic aspects of the current financial crisis. The informed view is that the credit crunch will result in global losses of around $1.2 trillion (£600 billion). About 40 per cent of these losses – or $480 billion – is expected to be absorbed by banks and financial institutions in the United States. Some expect the crisis to spread to the insurance sector. Britain does not come out unscathed. Gordon Brown’s Government has barely managed to bail out Northern Rock – the cost of which could be anything from £25 billion upwards. Huge Government credits are being made available to other banks while the Government is unable find resources to fund a decent state pension, rebuild schools and hospitals.

Not only have the financial regulators failed, there are also failures of other institutions. Credit rating agencies failed to downgrade banks holding toxic loans. Company accounts are supposed to alert markets and regulators, but failed to alert anyone. Company auditors collected huge fees, but their audit reports turned out to be worthless. Consider four examples.

Northern Rock received a clean bill of health from its auditors on its 2006 accounts. The auditing firm also acted as a consultant to the bank and received £700,000 for the non-audit work. The fee dependence is always likely to dull any sense of inquisitiveness.

On January 25 2008, Bear Stearns, America’s fifth largest bank, received a clean bill of health from auditors on the financial statements for the year to November 30 2007. Yet Bear Stearns could not sustain its financial position and, on March 17, it was sold to JP Morgan Chase for $2 (£1) a share, valuing it at £118 million. Just 16 days earlier, it was valued at £30 billion. Under pressure from major investors, the offer was raised to $10 a share.

On February 27 2008, Carlyle Capital Corporation, an £11-billion hedge fund registered in Guernsey, received a clean bill of health from auditors on its financial statements for the year to December 31 2007. The accounts stated that the directors were satisfied the group has adequate resources to continue to operate as a going concern for the foreseeable future. Two weeks later, Carlyle collapsed, as it could not reach financing agreements with its key creditors.

On February 27 2008, Thornburg Mortgage, America’s second-largest independent mortgage provider, published its audited accounts for the year to December 31 2007. These accounts carried a clean bill of health from auditors. Six days later, the company explained that it was renegotiating its financial position. The auditors retracted their opinion.

Although some financial institutions might grab headlines, similar failures have occurred in the recent past, most notably at Equitable Life, Independent Insurance, Barings, Johnson Matthey and Bank of Credit and Commerce International – to name just a few. The usual response after each of these is to tweak the regulatory structures, but little has changed. Above all, no questions are asked about the values embedded within the regulatory and political positions. The regulatory Humpty-Dumpty cannot be put back together by re-arranging the deckchairs. There are too many institutionalised failures.

The financial regulators are part of a political structure that is available for hire to the highest bidder. Corporations and a wealthy elite fund political parties and individual politicians with the aim of keeping threatening issues off the political agenda. They also fund think-tanks and various media to ensure that an ideological climate favourable to their interests is sustained.

Through revolving doors, corporate executives become regulators and regulators looking for higher financial rewards and company jobs go easy on corporate misdemeanours. The possibilities of emancipatory change are stymied and institutionalised social squalor is the inevitable result. Effective financial regulation is unlikely to be developed without a major change to the institutions of politics.

The crisis has been fuelled by the poverty of political policies. Successive governments have vacated the commanding heights and instead placed excessive reliance on interest rates to steer the economy. Companies wanted cheap money and successive governments obliged. With the low cost of borrowing, companies found it easier to make profits. Cheap money discouraged savings and fuelled a borrowing binge. Combined with speculative activities and cheap money, major companies doubled their profits. Yet regulators ask no questions about the quality of corporate earnings. Governments continue to mistake growth in company profits for economic renaissance.

Regulators reflect the broader political culture and are too close to business interests. Banks have been allowed to get way with booking their profits offshore, avoiding taxes, not passing interest rate cuts on to borrowers, slapping exorbitant interest charges on credit cards, imposing excessive overdraft charges and closing branches even though banks make huge profits. Yet no government has charged the regulators to protect the wider social interest. That task would require them to keep a certain distance from the regulated and develop alternative values, vocabularies and agendas. Openness would be a vital part of that drive. Thus all correspondence between the FSA and any financial institution must be publicly available. Yet there is little sign of such changes proposed in the FSA report.

Successive governments have refused to create effective regulatory structures on grounds of cost. Yet they fail to recognise that the lack of regulation also results in “costs”. Just ask anyone suffering from the consequences of the credit crunch.

Now, after Northern Rock, the FSA is promising to recruit additional staff and undertake annual reviews of banks’ strategy and plans. The examples of Bear Stearns, Carlyle and Thornburg show that, with a fundamental shift in the role of finance, the situation changes very quickly and an annual review is simply not timely enough to deal with any crisis. The FSA needs to eliminate accounting firms and instead create a dedicated taskforce of bank auditors or inspectors who are permanently present at banks and conduct continuous audits of business strategy, plans, liquidity, solvency, financial products and accounts. Yet politicians are not ready to take on corporate interests to promote this change.

Successive governments have shied away from doing anything about excessive executive remuneration. Yet this is central to the current financial crisis. At most banks and insurance companies, executive pay is linked to published profits. That provides plenty of temptations to massage company accounts, keep liabilities off balance sheets and even show bad debts as good. Ministers have no proposals to reform the executive reward system – for example, by linking it to broader performance benchmarks which include innovation, services to the local community and free banking for the poor.

The timidity of financial regulators has encouraged banks and financial businesses to become casinos above all. People’s savings and investments entrusted to them are gambled on the likely movement of the price of oil, gas, commodities, food, interest and exchange rate movements, often without adequate public accountability. This state of affairs is promoted as “risk management”, but has inflicted hardship on millions of people. This system has produced neither responsible management nor a vibrant economy. Yet no financial regulator has shown the inclination to tackle these habitual gamblers.

Without attention to the systemic factors and failures of institutions, such financial crises will continue to recur.

Prem Sikka is professor of accounting at Essex University

Economic Crisis: Capitalism Exposed

Ellie Keen — Sat, 23 Feb 2008 00:01:58 +0000

“Investors are no longer worried whether certain banks have enough cash. They are worried about the risk of a US or even a global recession.” So the Financial Times summed up the fear of those who live off capitalist profits on 18 January.

Mainstream economic commentators agree on one thing: the crisis that began in one section of the financial system last summer could be about to create chaos through much of the capitalist system which they support.

Former US secretary of the treasury Lawrence Summers says the US may be already sinking into a recession. Alan Greenspan, former head of the all important US Federal Reserve (the equivalent of the Bank of England), sees the chances of this happening as 50 percent. A United Nations report warns of a “clear and present danger” of the global economy slowing to near standstill this year.

Ben Bernanke, Greenspan’s successor at the Federal Reserve, tries to paint a slightly brighter picture. He expects slower growth this year but no recession. Bernanke is supposedly an expert on crises, having written academic dissertations on the role of money in the great slump of the 1930s. But last summer he failed completely to see that a crisis was about to hit the financial system. Not much faith can be put in his forecasts, or in those of other mainstream pro-capitalist economists. Their blind faith in capitalism as a money making machine for profiteers means that they nearly always believe things are going wonderfully until they suddenly go wrong.

In any case Bernanke was worried enough to cut interest rates, while George Bush is pressing Congress to agree on an emergency programme of tax cuts. They desperately hope that such measures can prevent an economic slowdown turning into a slump.

One thing is absolutely clear. The extreme optimism in the world economy which characterised most mainstream commentary just a year ago turned out to be completely wrong. Typical was April’s International Monetary Fund (IMF) World Outlook, with its forecast that “the world economy still looks well set for continued robust growth in 2007 and 2008”.

Gordon Brown, chancellor Alistair Darling and governor of the Bank of England Mervyn King were so enamoured of the wonders of the free market that they downplayed the seriousness of what was happening even after the crisis had erupted in mid-August. King resisted calls from his friends in the City to cut interest rates, while Brown and Darling believed that they only had to promise support for Northern Rock for its problems to be automatically solved. They had no notion that in the end tens of billions of taxpayers’ money would be involved. Faced with turmoil in the system, they are like people trying to navigate a ship without a map, compass or rudder.

They put their faith in orthodox “neoclassical” economics as taught in school and university as it is supposed to prove the superiority of capitalism to any possible alternative. But it has never been able to explain the system’s propensity for crisis.

The system rests on the unplanned interaction of thousands of multinational corporations and a score or so of major governments. It is like a traffic system without lane markings, road signs, traffic lights, speed restrictions or even a clear code that everyone has to drive on the same side of the road. This will make it very difficult for those who claim to oversee the system to prevent the crash in the financial sector generalising into something much more serious in the next few months. And any success they have will be temporary, at best deferring the moment of reckoning for a couple of years.

To see why, it is necessary to look at where the crisis has come from. The immediate cause, everyone now agrees, lay in the US’s subprime mortgage lending. Keen to make easy profits, financiers began lending money to people who would previously have been regarded as bad credit risks because they were poor, did not have secure jobs, or had not been able to pay off previous debts. House prices were rising and it was assumed that if they could not keep up with their mortgage payments their houses could be repossessed and sold at a handsome profit. Such lending had the effect of encouraging the very rises in the house prices it relied upon.

The financiers who lent the money did not usually do so out of their own pockets. They went to others to borrow, and these in turn would borrow elsewhere. At each stage small differences in interest rates for very large numbers of transactions involving very large sums of money meant enormous, apparently effortless, profits. Virtually all the major banks on both sides of the Atlantic joined in, setting up special entities to borrow in order to lend, packaging all sorts of different loans together into what were called “financial instruments”. For a time all seemed to go well, and those involved congratulated each other on their financial acumen and brilliant entrepreneurship. Just a year ago Northern Rock was “the toast of a glitzy City dinner where it was heaped with praise for its skills in financial innovation”. Politicians like Gordon Brown wholeheartedly agreed.

The first signs that all was not well were about 18 months ago. US economic growth slowed, causing a sharp increase in the number of mortgage holders who could not afford the interest rates on which the whole business depended and there were a growing number of repossessions. But those involved in the trade in financial instruments were more interested in continuing to make profits than in the problems of poor Americans.

Then as house prices fell the mortgage lenders discovered they could not make enough from selling off one million repossessed homes to pay back what they themselves had borrowed. The banks which had been so willing to lend them money just as suddenly found they faced losses of tens of billions of dollars. What made the situation even worse was that no one knew exactly how deep any particular bank’s problems were because the “financial instruments” were so complex. Financial institutions right across the capitalist system became afraid to lend to each other in case they found they could not get their money back. This was the “credit crunch”.

Modern capitalism depends for its day to day activity on borrowing and lending (See below: Banking and credit). Every business expects to be able to buy certain things on credit, deferring cash payment until it has sold what it has produced. A credit crunch has been compared to a heart attack. If it is not dealt with, the whole metabolism comes to a halt. That is why governments whose whole philosophy is one of not doing anything to interfere with the free market have rushed to do so, pouring billions of dollars into private hands, hoping the recipients will use the cash to start lending and borrowing again.

There are many media commentators who see the story as ending there. Usually the only lesson they draw is the need for more financial regulation. The whole debate over what has happened then degenerates into an argument about exactly how much regulation.

However, some have looked a little deeper. One of those who has been most worried about the direction of events has been Martin Wolf of the Financial Times (perhaps because he completely misjudged what was happening when the Asian crisis began in Thailand ten years ago, describing it as a mere “hiccup”). “I now fear that the combination of the fragility of the financial system with the huge rewards it generates for insiders will destroy something even more important – the political legitimacy of the market economy itself – across the globe”, he recently wrote.

Commentators like him point out that economic growth in the US since the last recession seven years ago has been to a considerable extent fuelled by growing debt, both of consumers and of the US government. Many of the goods produced by US firms could not be sold without that borrowing, and so if it dries up a slump is inevitable. It is not only US firms that are affected. If the US has been one motor of worldwide economic expansion, China has been the other. And central to its growth have been hundreds of billions of dollars a year of exports to the US.

To add to the difficulties – and to the complexities for governments and central bankers in trying to deal with them – much of the lending that has enabled US consumers to borrow to buy Chinese goods comes from China. Effectively China’s profits from selling goods to the US cross the Pacific to be used in the US to buy those goods. The US consumer, as Wolf put it, is the “buyer of last resort for the world economy”.

An important IMF-sponsored study of the world economy three years ago shows how this happens. About 10 percent of Chinese “savings” (to use the conventional term for profits) are left over after new investments have been made. Much of this excess has been poured as lending into the US economy. “Savings” from other south east Asian countries and oil producing states have followed the same path. Even US industry has been “saving” more than it invests, and lending the excess to the banks to lend to consumers.

Enormous implications

This has had enormous implications. For a capitalist economy to function smoothly the wealth being produced throughout the system must be bought. The world’s workers and peasants cannot buy more than a portion of it, because their living standards are held down to create profits. This means the rest must be used by the capitalists, either as their personal consumption, for state expenditures they regard as essential to themselves (armies, weapons, etc), or on investment aimed at producing future profits.

If investment falls below savings, a gap opens up between what has been produced and what is being bought. Some firms cannot sell all their output and sack workers in order to balance their books. This reduces still further what can be bought, and a slump ensues.

This has not happened over the last five years as lending to US consumers had provided extra markets and absorbed the surplus production.

The credit crunch is putting a stop to this, and house building and car sales in the US are already being hit. Even if the banks recover confidence in lending to each other, they are not quickly going to start lending again to people without very good credit ratings. That is why the prospects of a recession are so high, and why one would have an impact outside the US.

The story told by Martin Wolf and the others is not, however, complete. They cannot explain why the world economy has become so dependent on the US consumer. To answer that question it is necessary to look deeper than any version of mainstream economics – to an ailment which the world economy has been suffering from since the 1970s.

What motivates capitalists to invest is not just the absolute level of profits they make, but the “rate of profit” – the ratio of profits to investment. This stayed more or less steady through the late 1940s, the 1950s and the 1960s. That is why these years saw a rising investment and a continual boom, sometimes referred to as “the golden age of capitalism”. But from the late 1960s through to 1982 profit rates fell, until they were only about half the average level of the previous two decades (see below: Marx and the rate of profit). The deep economic recessions of the mid-1970s and the early 1980s were a result of this fall.

Mainstream economists usually blame sudden rises in the price of oil for those recessions. But those rises would have easily been absorbed by the system had profit rates not already fallen so much.

Profit rates were able to stage partial recoveries in the mid-1980s and the mid-1990s. One thing which enabled them to do so was increasing the share of total profits in total national incomes at the expense of wages. Everywhere this meant increased pressure for people to work harder and attacks on welfare services (the “social wage”). In the US it has also meant a fall in the real wage from the early 1970s until the late 1990s and a massive increase in working hours. In Europe there has not yet been the same fall in real wages, but Britain has seen a rise in working hours (particularly if you include the unpaid overtime that is the fate of many white collar workers) and the pressure is now for the major European countries to follow suit.

Alongside this, the bankruptcies of some big capitalists have allowed others to gain at their expense. Rupert Murdoch will have gained from the demise of Robert Maxwell’s media empire 15 years ago, a wave of bankruptcies in the airline industry will have helped the profits of survivors like British Airways, BAe will have benefitted from the troubles of GEC-Marconi, and so on.

But the profit rates never recovered more than about half their previous decline and the booms suddenly ran into trouble with the stock exchange crash of October 1987 and the Asian crisis of 1997. On both occasions the US Federal Reserve and the Bank of England reacted by cutting interest rates and encouraging lending. Such measures were able to extend the booms, and media commentators boasted that capitalism had entered a new era of endless growth on each occasion – until it turned out that the recessions had been deferred a couple of years, not banished forever.

The recession of 2001-2 was particularly threatening to the US economy. Giant firms like General Motors were already making losses before the 9/11 attacks, which added to the panic in the boardrooms. The US government rushed to cut taxes to the rich and to boost arms spending, while the Federal Reserve slashed interest rates so as to encourage even greater levels of borrowing than before. This dragged the economy out of recession – indeed, some mainstream economists went as far as to say the recession never happened. But it laid the ground for the problems the system faces now.

For a time firms were able to improve their profit rates by making massive cuts in their workforces, with 2.7 million manufacturing workers (about one in six) losing their jobs. Real wages, which had risen for the first time in a quarter of a century in the late 1990s, fell again. But even so calculations made by Marxist economist Robert Brenner suggest that the peak for profit rates in 2005 was only about the same as the levels on the eve of each previous crisis since the mid-1970s. In 2006 the country’s biggest firm, WalMart, announced a fall in its profits and the big US owned car companies General Motors and Ford made record losses. It is then that the slowing down of economic growth hit the ability of many poor people to keep up with the mortgage repayments.

The rise in profit rates had not been enough to raise investment to its previous level – Brenner calculates investment growth was the lowest in any economic recovery in half a century. But raising profits had cut into the capacity of workers to buy all the consumer goods being produced by the economy out of their wages. Hence the centrality of personal borrowing, which rose to the record level of 9 percent of gross domestic product. There has been no other way all the goods produced by capitalism could be sold. If borrowing collapses, there has to be a recession.

This is not just the US’s problem. Some people point to the massive rate of expansion of the Chinese economy and suggest this can rescue the rest of the system. But that expansion rests to a large extent on selling goods to the US. If the US economy goes into crisis, it will face problems as well.

The response of capitalist governments and their central banks has been to look for some desperate ploy to keep borrowing going. One way to do so is to cut interest rates so as virtually to give money to the banks to lend to people. Martin Wolf has compared this to dropping money from helicopters. Another way is to increase government borrowing. This is what Bush is proposing with his tax cuts.

But states always face a problem if they simply print banknotes in order to cut interest rates or to cover the cost of cutting taxes. Such methods can sometimes give a short term boost to a flagging economy. But they are necessarily a short term remedy, since they do not solve the fundamental problem of how to raise profits to induce investment without cutting wages in a way that cuts the market for goods. So the Japanese state cut interest rates to virtually zero through the 1990s and still did not get the economy working back at its old levels.

Governments in the US and Europe fear such measures would increase prices (on top of the existing upsurge of oil and food prices) without stopping the economic slowdown, producing the combination of stagnation and inflation known in the late 1970s as stagflation. In the US the fears are deepened by the way in which the combination of the financial crisis and low interest rates is leading to a rapid fall in the international value of the dollar. That will both increase domestic prices in the US and weaken the global economic power of the US ruling class.

It is just possible, nevertheless, that such measures will defer the crisis, as they did at the end of the 1980s and 1990s. But they will not be able to do more than that.

The British economy faces some of the same problems as the US. Borrowing has been at an even greater proportionate level here than there, with a debt to disposable income ratio of 162.9 percent compared to 137.3 percent. The house price boom has been even crazier, with average prices quadrupling in 12 years. There are already signs that house prices are beginning to fall and repossessions to rise.

More importantly, perhaps, Gordon Brown’s policy over the past 11 years has been to compensate for the continued destruction of industrial jobs by trying to make London the centre of the world’s financial system. As a result the financial crisis can have a proportionately bigger direct effect on jobs here than elsewhere. At the same time, he has less room for manoeuvre than the US government when it comes to trying to keep the economy up by substituting government spending for private borrowing. He began increasing government spending six years ago (after cutting it to the bone in the previous four years), as a way of trying to sustain electoral support and limiting the impact of the last US recession. He is now under pressure to cut spending.

His response so far has been based on his faith that the market can work wonders providing he can keep capitalists happy. Hence his offer of vast amounts of money for a “public private” solution to the Northern Rock disaster. Hence too his insistence on holding down pubic sector pay.

Such measures are not going to be sufficient to protect British capitalism if the storm brewing in the US comes to a head this year. But they are going to deepen discontent with his government. They can also open many people up to arguments about the insanity of an economic system driven forward by the drive for profit.

Banking and credit

The financial system is often portrayed as a “weightless”, “global” system with no roots in the “real” economy and no particular national base.

But finance has long been of central importance to capitalism. At any moment some capitalists will have excess cash that they cannot invest, while others will want to expand but will not have access to the capital to do so.

Banks allow capitalists to deposit money they can’t use immediately and earn interest, or to borrow money they need for which they pay interest.

This lubricates capitalism, but if the system goes wrong it can threaten the stability of the whole system. As Karl Marx put it, “Banking and credit thus become the most potent means of driving capitalist production beyond its own limits – and one of the most effective vehicles of crisis and swindle.”

Central banks, such as the US Federal Reserve and the Bank of England, are key players in the world of finance. These central banks, which are subject to varying degrees of governmental control, are firmly rooted in a particular country, forming a pivot around which the wider financial system revolves.

Generally they will have a monopoly over the issue of legal tender and great power to influence interest rates.

Marx and the rate of profit

The rate of profit – how many pence in profit the capitalists get for each pound they invest – is central to the dynamics of capitalism. Karl Marx argued that there was a tendency for this rate of profit to fall.

He argued that “living labour”, the labour put in by those exploited by a capitalist, was the source of profit. Living labour creates new value, and some of this value is returned to the worker in the form of wages. Profit comes from the surplus value left over.

But capitalists don’t just hire living labour. They also purchase “dead labour” – machinery, raw materials and so on. This is the product of past labour by different groups of workers. The capitalists who manufacture and sell these things might make a profit on them, but the capitalist who purchases this dead labour makes no profit on it.

Marx argued that over time competition forces capitalists to invest in more and more dead labour – so each worker sets in motion a greater mass of machinery and raw materials. But if the total amount of dead labour rises, while the living labour (the source of profit) stays the same, the capitalist will invest more but get the same profit. Hence the rate of profit will fall.

Housing and the 'Credit Crunch'

Ellie Keen — Tue, 19 Feb 2008 20:49:22 +0000

Accountant Ross Baptie (RB) answers some of Corporate Watch’s (CW) questions

CW: ARE THESE ‘SUB-PRIME’ MORTGAGES A NEW THING?

RB: Relatively new. A decade or so there was very little mortgage lending to people who couldn’t afford them. There were rigid, self-imposed, rules governing how banks & finance companies chose whether someone was creditworthy enough to qualify to get a mortgage. As with all things in capitalism however, once a particular market (i.e. creditworthy borrowers) has been exploited and pushed to the limit, it begins to look elsewhere. This means it will seek to either deepen penetration of the existing mortgage market or to expand into areas that were previously untouched.

One new area was the increase in buy-to-let mortgages and the encouragement of that whole sector (which has yet to collapse), and the other area was that of ‘sub-prime’ lending. A whole raft of people were watching from the sidelines during the boom in the housing market. Partly due to their own desires, but also partly from the manufactured desire whipped up by the housing boom, these people were desperate to own their own homes. Under traditional (risk averse) approaches to mortgage lending they never had a hope of getting loans big enough and affordable enough to buy a home.

Normally it wouldn’t make sense for banks and building societies to lend to someone who was clearly a bad risk and had a bad credit history. However, a mixture of things caused lenders to move beyond this traditional approach:

i) The massive rise in home values in the last few decades meant that even though someone who borrows money to buy a place may eventually struggle to pay back the repayments on it, the fact that in general house prices were rising, meant that if the borrower did default on the loan, the lender could simply repossess the house. The chances are it would have increased in value so they could then sell it and recover their outlays

ii) As existing mortgage markets were nearly saturated there was a risk that there would be a halt of ‘new’ money coming into the housing market. First time buyers were finding it harder and harder to find somewhere affordable to buy; especially as money coming into the housing market from first time buyers is what props up the whole market and allows people to buy and sell at the higher end.

iii) After 9/11 US interest rates were slashed from around 6% to 1% to ‘stimulate’ the economy. As result of this, servicing the loans on mortgages became more than 80% cheaper than before. This drew new people in to home ownership – which was now within their grasp due to the supply of cheap money being made available in the wholesale credit markets.

iv) Normally the worse a borrower’s credit rating is, the higher the rate of interest charged on a loan. This is to compensate the lender for the increased risk that they take on in lending in the first place. Usually this would mean that the borrower would be unable to afford the repayment/interest payments – as they might be paying 10% interest on a loan that someone with a good credit would only pay 5% on. To get round this problem, the notion of ‘credit repair’ was dreamt up. This involved lending money to the borrower to buy their home, but for the first two years of the mortgage term, on a massively reduced interest rate (say 4%). The idea was that the borrower would pay this reduced rate for the first two years then when it came to the end of that period, they would re-mortgage, with their two years of good credit history allowing them to get a mortgage at a more normal rate of interest.

The theory didn’t work at all well in practice. Borrowers came to the end of the two year term, found that their credit had not been ‘repaired’ and were then faced with a near-doubling of their monthly payments when the rate on the loan reverted back to its normal market rate. In addition, this rate rose again, as interest rates went back up to the pre 9/11 level. Therefore the bulk of people had to default on their loans. Although a nightmare for the individual, this would not have been catastrophic for the market, but for the sheer scale of it. In 2006 sub-prime mortgages accounted for about 20% of the entire mortgage market.

The massive levels of defaulting led to houses being repossessed and sold off to recover the debts, causing a huge downwards pressure on house prices. The repossessed houses coming onto the market forced prices down to a level lower than the one lenders had borrowed at, which left banks and building societies facing big losses on their loan portfolios. The collapse was compounded by sub-prime mortgages being parcelled up into ‘investment vehicles’ and sold off to hedge funds and the like – companies which had a higher appetite for risk. This made it difficult to see where risk was concentrated, as ownership of the initial mortgage asset had been sold on countless times since the original loan.

CW: IS THE NORTHERN ROCK FIASCO A RELATED ISSUE?

RB: It’s related, but indirectly.

The initial lenders of sub-prime mortgages – i.e. those who deal directly with the person who wants the mortgage – were mostly finance corporations set up to specialise in this type of risk. These companies got their money by borrowing on the wholesale credit markets. These markets consist pretty much of big institutional investors lending money between themselves: mainly pension funds, insurance companies and traditional banks. When the extent of the sub-prime problems became known and it looked likely that huge numbers of people would default, these institutions, that had previously happily lent to the sub-prime mortgage companies, began to sit up and take notice and became extremely cautious as to who they would now lend to/invest in, and also increased the rates of interest that they charged on the money they were lending. This led to a ‘credit crunch’ in the wholesale lending market, and the relatively cheap money feeding into the US sub-prime mortgage companies dried up. This put a lot of the sub-prime mortgage companies out of business.

Another impact of the credit crunch was that the other banks and mortgage providers, who also borrow in the wholesale international credit market, found that they were either unable to access this market or to afford the increased interest on borrowed money. This hit all banks and mortgage lenders in the UK.

Northern Rock stood out from the rest in that their massive share of the UK mortgage market (something like 20%) was mostly financed through borrowing on the wholesale credit markets. This is unlike other mortgage providers in the UK, who fund a large proportion of their mortgage lending through banking deposits from customers. As Northern Rock had such a big share of the mortgage lending market and a relatively small level of depositors, they had to rely more on the wholesale credit market to plug the gap. When this closed up, they were the first to start wobbling. Panic leads to panic and the subsequent run on the bank with depositors withdrawing their savings meant that they faced an even bigger funding gap. In the end they had to take an emergency loan from the Bank of England to keep them going.

CW: WHAT IMPACT DO HOUSE PRICES HAVE ON THE STOCK MARKETS?

RB: Rising house prices increase the value of home owners’ assets. This in itself has no direct effect, but recently many more people have taken advantage of this increased asset in various ways

i) Re-mortgaging (borrowing more money on the basis of a higher house value, and then using that money for home improvements, investing in more property, buying cars, holidays, etc.)

ii) Running up higher credit card bills, safe in the knowledge that even though they have £10-20,000 debt here on various cards, their overall net asset position is still good as the rise in house prices dwarfs this debt.

iii) Spending their existing savings, safe in the knowledge that they have the buffer of their main asset, their house, continually rising in value

So all these factors meant that much more consumer spending could be systematically maintained by home owners during a period of extraordinary house price growth. The more consumer spending there was, the more companies benefited; their share prices also increased, due to the actual and potential future profits they could make on the back of ever increasing house prices. This resulted in stock markets surging ahead in tandem with the housing market. The opposite applies when house prices collapse.

Northern Jelly

JamieSW — Tue, 19 Feb 2008 13:14:15 +0000

A friend of mine who works in the City and is knowledgeable about the laws, regulations and internal procedures of investment banking said to me the other day: “Investors are the most pampered people in the world. There are so many laws and regulations designed to protect their rights, it’s unbelievable.” Laws designed to protect the property rights of the owners. Who would have imagined such a state of affairs? Well, today investors are predictably furious about the temporary nationalisation of Northern Rock. If a neoliberal government like ours undertakes a nationalisation, you know it’s serious. But the owners aren’t happy. Their shares, their shares! The socialistic government has stolen their money! Somehow they promise to mount a legal challenge, just as the shareholders in Railtrack did when the government allowed the company to go bankrupt rather than bailing it out with yet further billions in public money. The City is also alarmed. The government exists, as far as they are concerned, to defend their interests and as far as they are concerned that means the guarantee of private profits with public money, and private ownership with public risk. This sort of thing gives people ideas.

Nevertheless, there cannot be too much shock. Practically everyone knew that nationalisation was the only option in this case, and it was simply not plausible to continue ploughing in billions – the Bank of England has loaned the company £55bn, which is eleven times its value at its peak last year, and many more times its present value of £380m, while – while the owners floundered and frittered it all away. If anything, it would have been an obvious decision several months ago, long before a single penny of subsidy had been issued. The government has tried desperately to avoid it. And after all, the nationalisation is only a temporary measure designed as much to protect the institution and return to private capital in good condition once the economy gets back into good shape. And it will be run by highly paid individuals from the banking industry, such as Whatever the shareholders say, the rentier class will probably be quite relieved as a whole. Even Martin Wolf of the FT backs the nationalisation and gives a few reasons why the grasping bastards who have run the thing into the ground shouldn’t be given any compensation.

The Tories are arguing that this decision amounts to a ‘humiliation’ for Alistair Darling, and are raising the spectre of a return to the 1970s (a much maligned and underestimated decade). On the one hand, it’s faintly embarrassing in itself that to change your mind is supposed to be a source of embarrassment, but on the other hand, Darling has sort of brought that on himself by straining so hard to avoid nationalisation. Anatole Kaletsky is predicting catastrophe on the absurd grounds that nationalisation is a form of market ‘distortion’ and anyway the government is crap at running things. Are there really people who still believe in the free market fairytales? Does he not know how his employer pays the bills?

Nationalization is often a poor substitute for socialisation rather than a synonym for it. It is usually a prophylactic, in fact, against such measures, a manageable half-way house. In this case, it doesn’t even go as far as that. It is a temporary stop-gap, without any guarantees as yet for the workers in the bank, which places £100bn of public money on the line, with the company’s future co-determined by a small number of experts from the industry, in order to return the business to private ownership as soon as possible. But still, it does give people funny ideas. You know, in a world where Morales is nationalising the gas industry, Chavez nationalised much of the oil industry (and was going to nationalise the whole banking industry), and even the Scottish executive is planning to fully nationalise the railways, the convenient myth that public ownership is ‘unrealistic’ is starting to look, well, unrealistic. And that raises all sorts of questions.

We were told that privatising utilities would bring us more efficient, lower cost services. British Gas has just jacked up the prices and is making record profits, while energy companies like Npower do the same. The privatization of water has been disastrous in many places, and in the UK it has led to exorbitant costs and low maintenance. The privatised airports are uncomfortable and overcrowded because they allot most space to commercial facilities and provide little seating or other amenities. Privatization also led to increased unemployment and diminished bargaining power for labour. In each of the industries privatized by the Tories, employment fell dramatically – in steel by 75%, in railways by two thirds, and in electricity and water by about a half. Right-wing economists complain about over-employment, but the danger was always in the contrary temptation – to cut necessary staff and make the service unsound. And what is the point of having ‘competition’ in the banking industry when they all provide much the same lousy service and rip you off? Wouldn’t a publicly owned and accountable industry be better for customers? And why should we have to pay for their crisis? If a company can’t or won’t keep its business running to keep people employed, shouldn’t the government use its initiative, nationalise, defend jobs and engage in industrial conversion if necessary?

Oh, Jesus no, don’t start thinking like that! Winter of discontent, remember? You don’t want to go back to the bad old days, especially not when everything is so fabulous.

A mucky business

JamieSW — Tue, 19 Feb 2008 13:06:27 +0000

THE whole Northern Rock fiasco has been a mucky business from beginning to end.

What was, a year ago, the darling of the Stock Exchange, with shares priced at over 1226p each, is now a crisis-ridden mess with shares priced at under 90p.

Despite all of the hot air pumped out by the money-men in the stock market, this fiasco is solely and exclusively the responsibility of greedy, profit-fixated speculators prepared to take any risk for a fast buck. And, boy, have they come unstuck.

Chancellor Alistair Darling claims that he is now “nationalising” the bank because that is the only way that the taxpayers’ money, which he so freely used to underwrite the failing enterprise, can be safeguarded.

But those of us who hold nationalisation dear, as a step towards the elimination of speculation and predatory capitalism, must step carefully here.

What Mr Darling calls nationalisation holds about the same relationship to the real deal as a farmyard chicken does to a golden eagle.

Bear in mind our treacherous Prime Minister’s description of the Chancellor’s brand of nationalisation. “We want,” he said, “a successful company that we can pass onto the private sector at the earliest opportunity.”

He insisted that the problems in the US sub-prime mortgage market which, he claimed, had led to the collapse of Northern Rock, could not have been foreseen.

But, despite all the talk, it was not merely the US sub-prime crisis that triggered Northern Rock’s problems. It was British banks losing their nerve and pulling the rug out from a company that had taken one gamble too many.

And it is not Mr Darling’s brand of nationalisation that will save it.

The issues that are important in this situation are the jobs of Northern Rock employees, which the unions are rightly concerned about.

And don’t forget the stability of the British economy, which will hardly be guaranteed by stripping out the problems of Northern Rock and handing it back to the same gang of speculators that screwed it up in the first place, the vultures of the City.

Putting Ron Sandler in charge of the company at over £1 million a year, with a deputy on very little less, is hardly a good sign.

It is to hoped that Mr Sandler’s reputation for toughness will mean that he can stand up to the hedge-fund profiteers who, having bought and increased their shareholdings after the share price dropped through the floor, are now the loudest in their protestations that the government is trying to rip off shareholders and demanding massive compensation for their supposed losses.

Hedge funds RAB and SRM involvement in campaigning for a fair deal for shareholders has raised eyebrows in light of the timing of their purchase, with many of their shares bought after the bank’s troubles began last autumn.

The hedge funds have, in fact, been increasing their stake in recent days and clearly hope to talk their sticky fingers into the public purse.

It will help if Mr Sandler resists both that and the temptation to cut jobs in order to slim the company’s costs.

But any real solution rests on messrs Brown and Darling resorting to real nationalisation, not the cosmetic exercise that they are contemplating.

And the chance of that happening with this new Labour gang is about the same as a farmer rearing golden eagles in a chicken run.

Northern Rock crisis deepens

Tim Holmes — Sat, 22 Dec 2007 09:54:18 +0000

What began as a crisis of liquidity for one bank has become a major political crisis for the British government. The failure of the attempt to bail out Northern Rock has led to serious political recriminations and conflicts among the political and financial elite as the Labour government of Prime Minister Gordon Brown finds itself pouring money into a bottomless pit.

Northern Rock is the UK’s eighth largest bank. It has specialised in mortgage lending based on the availability of cheap credit. The credit crunch that followed the collapse of the US sub-prime mortgage market meant that Northern Rock was unable to raise loans. The Bank of England stepped in to provide loans when depositors scrambled to withdraw their money in the first run on a British bank since Overend and Gurney in 1866. Even Wall Street shuddered at the spectacle. The threat of contagion was felt internationally, and the Bank of England was forced to act.

That was in September. Now, three months later, the Bank’s action has not only not failed to resolve the crisis, but it has deepened it as it transformed bank deposits into public debt. The obligation shows no sign of lessening. In October, the Bank was lending £2 billion a week to Northern Rock. Its commitment to guarantee the depositors’ savings amounted to an estimated £24 billion—the equivalent of the entire annual transport budget.

Even that huge sum has been dwarfed by the Treasury’s announcement on Tuesday, December 18, that it will guarantee all wholesale deposits and borrowing that do not require collateral. It is estimated that the government’s exposure will increase to £100 billion, three times the annual defence budget or the equivalent of the National Health Service budget. The sum amounts to more than 16 percent of total public spending—all of which has been committed to one bank.

The Treasury’s announcement means that the fate of millions of ordinary working people is being pitted directly against the interests of a few wealthy finance capitalists. For this plutocratic layer, even the present credit crisis offers a means of making money. The immediate response of Northern Rock’s largest shareholder, the hedge fund SRM, was to increase its stake in the company. Northern Rock shares rose by 2.2 percent on the announcement of extra government funding.

The Treasury’s decision follows the attempt by central banks to stimulate the flow of credit by injecting funds into the international market. But tens of billions of dollars and a coordinated cut in interest rates have failed to restore confidence and have only confirmed the seriousness of the crisis facing the international banking system.

What had manifested itself initially as a crisis of liquidity is proving to be something else—a crisis of solvency. In guaranteeing Northern Rock’s wholesale debt, the Treasury has tacitly admitted that.

The problem is not a contingent one of liquidity caused by temporary market conditions, but a systemic one of solvency produced by the creation of massive amounts of fictitious capital. Northern Rock was able to maintain its business model because of the development of what has been termed ‘the shadow banking system.”

“A plethora of opaque institutions and vehicles have sprung up in American and European markets this decade,” according to the Financial Times, “and they have come to play an important role in providing credit across the financial system.” Their dealings never appear on the balance sheets of the “real” banks that use them. The full extent of this system is only becoming apparent now that it is imploding.

In the United States, the shadow banking system may have accounted for half of all new credit created in the last two years. Northern Rock was entirely dependent on the boom in cheap short-term credit that this market produced. The market in Structured Investment Vehicles (SIVs) and Collaterialised Debt Obligations (CDOs), in which the shadow banking system deals, is closely linked to the hedge funds that provide the equity that underpins the system. Both the hedge funds and the shadow banking vehicles rely on highly geared ratios of debt.

In one case “just $10m of real, unlevered hedge fund money supports an $850m mortgage-backed deal.” Satyajit Das, expert in derivatives, told the Financial Times, “This means $1 of real money is being used to create $85 of mortgage lending—credit creation far beyond the wildest dreams of high-street bankers.”

As investors withdraw their money from this shadow banking sector, something like a super-bank run is taking place. But it is not one that produces television footage like that at Northern Rock. The SIV sector is thought to have seen its value shrink by US$150 billion this year from its peak of US$400 billion with another US$400 billion lost from the CDOs. What has been termed the “Vehicular Finance Sector” is running into a multi-vehicle smash.

The pile-up leads back to the major banks, which are ultimately responsible for lines of credit they never thought they would have to realise. Nor do they have the assets to do so. Banks used to have the capital to cover their liabilities. But regulatory reform has allowed them to package their loans into bonds, which they have sold to other institutions. It is this process that lies behind the ballooning of credit in recent years.

Northern Rock created SIVs through what was supposedly a charity. It raised £71 billion through a trust called Granite, registered on the Channel Island tax-haven of Jersey. The trust’s prospectus says that profits “will be paid for the benefit of the Down’s Syndrome North East Association (UK) and for other charitable purposes.” However, the small charity Down’s Syndrome North East knew nothing about the trust and has so far received no donations.

Remarkably, this practice is entirely legal. Investigations by the Guardian have revealed that the business model employed by Northern Rock is far from unusual. Other major British banks have adopted the same strategy of bundling mortgages together and then using the package to raise loans through off-balance sheet trusts with charitable status. The trusts are not obliged to (and in practice rarely do) give anything to charity.

Twelve major banks have used the same technique to raise money on £234 billion of home loans. So complex is the structure created by this method that the full liabilities of the banks are unknown. In the case of Northern Rock, the £30 billion lent by the government may not be actually covered by the value of the home mortgages on their books.

Even if £30 billion is an accurate figure, it was based on the inflated house prices of recent years. House prices are now falling, and since Northern Rock often lent 90 percent or more of property value, it will not be long before the asset value no longer covers the Bank of England loan.

The Treasury stressed that its wholesale debt guarantee does not underwrite the liabilities of Granite. But it is difficult to see how the government can protect itself from this largely hidden mountain of debt. Nobody knows just how highly geared Northern Rock’s vehicular investment may be.

The government’s aim in guaranteeing Northern Rock’s wholesale debt was to make the company more attractive to a buyer. Two potential buyers exist—the Virgin group of Richard Branson and Olivant, a private equity company—but neither has been able to raise the finance necessary. No bank is willing to underwrite such a large deal and agree to repay the massive Bank of England loan when the credit markets are frozen. The result is that the government has been forced to make even more money available in an attempt to sugar the pill.

It is increasingly being recognised that the only alternative the government has is to nationalise Northern Rock. The government is said to have already drawn up proposals to do so.

Even so, significant interests remain wary of nationalisation. Robert Parker, head of asset management at Credit Suisse, assured the BBC that the Treasury guarantee does not make nationalisation more likely. The government is gambling that the central banks’ injection of funds into the international credit markets will eventually pay off in the New Year and allow a buyer to raise sufficient money. It will then avoid having to make a policy u-turn. But that scenario is looking increasingly unlikely.

Vince Cable, the caretaker leader of the Liberal Democrats, is one of the strongest advocates of nationalisation. He has been highly critical of the government. It “now seems to have got the worst of all possible worlds,” he told the BBC on Tuesday. “It’s effectively nationalised the liabilities of the bank while at the same time it doesn’t control it—it doesn’t own it, and if it is sold then all of the upside—all of the capital gains—will accrue to speculative investors and not to the taxpayers.”

The only practical option, Cable argues, is for the government to take Northern Rock over in the short term and sell it when market conditions improve. A broad consensus of opinion seems to favour that option. The Guardian and the Financial Times have both argued for nationalisation. They point to the precedent of the Long Term Credit Bank in Japan, which was nationalised in 1998 and then sold to a US private equity firm. The Bank of England stepped in to rescue the National Mortgage Bank in 1994, and the US government effectively nationalised Continental Illinois before selling it.

Even the shadow Chancellor, George Osborne, has called for “the authorities to intervene and seize control of a financial institution when it is close to failing.” He warned in the Financial Times that the damage to the City of London continues every week that the future of Northern Rock hangs in the balance.

“We must stop the ugly sight of shareholders who have come in since September holding the taxpayer to ransom, when those shares would be worthless without the Bank’s support,” he said.

From a potential Tory Chancellor of the Exchequer this is remarkable language. But it reflects the scale of the crisis and the extent to which existing political formations and their economic programmes have been challenged by the collapse of the credit market.

Brown prides himself on having engineered the longest period of sustained economic growth since records began. He has been thrown into a political crisis by the sea-change that is taken place. His whole political perspective is based on the period of credit-fuelled economic growth. The credit crunch has destroyed the illusion of his financial competence and left his government seemingly paralysed.

Powerful figures are concerned at this situation. Rupert Murdoch’s economic adviser, Irwin Stelzer, took the unusual step of using the front page of the Times to attack Brown’s government at the weekend. Stelzer reports a Bank of England senior official saying that Gordon Brown and Chancellor Alistair Darling are now “unable to focus because morale throughout the government is so low.”

For a government that has relied on Murdoch’s approval since the Blair administration came to power in 1997, Stelzer’s very public criticism is devastating. Murdoch wields this kind of power because he speaks, not just for himself and his media empire, but for the financial oligarchy on which the Labour government relies and to which it answers. The plutocratic elite want decisive action, even nationalisation, provided it is envisaged as a temporary measure and the prelude to selling Northern Rock back into the market once conditions allow.

In reality, there is no guarantee of any future recovery in the financial sector, but quite the reverse. Most analysts are predicting a major economic downturn in the New Year, in Britain and internationally. Nationalising Northern Rock under these conditions will have an “upside” only as far as its major investors are concerned, with the state paying them billions for shares that are worthless.

Ever since Labour came to power in 1997, it has set its face against nationalisations and has been committed to privatisation of public assets. For it to be forced to resort to such a measure—and to do so only in order to guarantee the investments of the supposedly superior private sector finance institutions—is more than merely an exposure of its free-market propaganda. It will be a grotesque example of its continued readiness to pick the pockets of working people in order to feather the nests of the major corporations and banks.

It's the Libertarians who Bleed us Dry

Ellie Keen — Mon, 22 Oct 2007 23:55:34 +0000

“The little-known ninth law of thermodynamics states that the more money a group receives from the taxpayer, the more it demands and the more it complains.” Thus wrote Matt Ridley in 1994(1). He was discussing farm subsidies, but the same law applies to his chairmanship of Northern Rock. Before he resigned on Friday, the bank had borrowed £16 billion from the government and had refused to rule out asking for more. Ridley and the other bosses blamed everyone but themselves for this disaster.

I used to read Ridley’s columns religiously. Published by the Telegraph in the 1990s, they were well-written, closely-argued and almost always wrong. He railed against all government intervention and mocked less enlightened beings for their failure to understand economics and finance. The right-wing press loved him because he appeared to provide a scientific justification for the deregulation of business.

Ridley’s core argument, which he explains at greater length in his books, is that humans, being the products of natural selection, act only in their own interests. But our selfish instincts encourage us to behave in ways that appear altruistic. By cooperating and by being perceived as generous, we earn other people’s trust. This allows us to advance our own interests more effectively than we could by cheating, stealing and fighting. To permit these beneficial genetic tendencies to flower, governments should withdraw from our lives and stop interfering in business and other human relations(2,3). Ridley produced a geneticist’s version of the invisible hand of the market, recruiting humanity’s selfish interests to dole out benefits to everyone.

Dr Ridley, who has a D Phil in zoology, is no stranger to good science, and his explorations of our evolutionary history, which are often fascinating and provoking, are based on papers published in peer-reviewed journals. But whenever a conflict arose between his scientific training and the interests of business, he would discard the science. Ignoring hundreds of scientific papers which came to the opposite conclusion, and drawing instead on material presented by a business lobby group called the Institute of Economic Affairs, he argued that global temperatures have scarcely increased, so we should stop worrying about climate change(4). He suggested that elephants should be hunted for their ivory(5), planning laws should be scrapped(6), recycling should be stopped(7), bosses should be free to choose whether or not their workers contract repetitive strain injury(8) and companies, rather than governments, should be allowed to decide whether or not the food they sell is safe.(9) He raged against taxes, subsidies, bail-outs and government regulation. Bureaucracy, he argued, is “a self-seeking flea on the backs of the more productive people of this world … governments do not run countries, they parasitise them.”(10)

I studied zoology in the same department, though a few years later. Like Dr Ridley, I am a biological determinist: I believe that much of our behaviour is governed by our evolutionary history. I accept the evidence he puts forward, but draw completely different conclusions. Ridley believes that modern humans are destined to behave well if left to their own devices; I believe that they are likely to behave badly. If you belong to a small group of intelligent hominids, all of whom are well-known to each other, you will be rewarded for cooperation and generosity within the group. (Though this does not stop your group from attacking or exploiting another). If, on the other hand, you can switch communities at will, travel freely, buy in one country and sell in another, hire strangers then fire them, you will gain more from acting only in your own interest. You’ll have an even stronger incentive to act against the common good if you run a bank whose lending and borrowing are so complex that hardly anyone can understand what is happening.

Dr Ridley and I have the same view of human nature: we are inherently selfish. But the question is whether or not this nature is subject to the conditions that prevailed during our evolutionary history. I believe that they have changed: we can no longer be scrutinised and held to account by a small community. We need governments to fill the regulatory role vacated when our tiny clans dissolved.

I can offer nothing more than speculation, but Ridley has had the opportunity to test his beliefs. He took up his post – which was previously held by his father, Viscount Ridley, in 2004. Under his chairmanship, the Economist notes, Northern Rock “pushed an aggressive business model to the limit, crossing its fingers and hoping that liquidity would always be there”(11). It was allowed to do so because it was insufficiently regulated by the Bank of England and the Financial Services Authority. When his libertarian business model failed, Dr Ridley had to go begging to the detested state. If the government and its parasitic bureaucrats had not been able to use tax-payers’ money to clear up his mess, thousands of people would have lost their savings. Northern Rock would have collapsed and the resulting panic might have brought down the rest of the banking system.

The £16bn bail-out is not the end of the matter. Last week the Treasury granted Northern Rock’s customers a new tax break(12). Now one of the north-east’s leading businessmen, Sir Michael Darrington, is calling for the bank’s full-scale nationalisation in order to prevent further crises(13). So much for the virtues of unregulated free enterprise.

Wherever modern humans, living outside the narrow social mores of the clan, are allowed to pursue their genetic interests without constraint, they will hurt other people. They will grab other people’s resources, they will dump their waste in other people’s habitats, they will cheat, lie, steal and kill. And if they have power and weapons, no one will be able to stop them except those with more power and better weapons. Our genetic inheritance makes us smart enough to see that when the old society breaks down, we should appease those who are more powerful than ourselves, and exploit those who are less powerful. The survival strategies which once ensured cooperation among equals now ensure subservience to those who have broken the social contract.

The democratic challenge, which becomes ever more complex as the scale of human interactions increases, is to mimic the governance system of the small hominid troop. We need a state that rewards us for cooperating and punishes us for cheating and stealing. At the same time we must ensure that the state is also treated like a member of the hominid clan and punished when it acts against the common good. Human welfare, just as it was a million years ago, is guaranteed only by mutual scrutiny and regulation.

I doubt that Dr Ridley would be able to sustain his beliefs in a place where the state has broken down. Unless tax-payers’ money and public services are available to repair the destruction it causes, libertarianism destroys people’s savings, wrecks their lives and trashes their environment. It is the belief system of the free-rider, who is perpetually subsidised by responsible citizens. As biologists we both know what this means. Self-serving as governments might be, the true social parasites are those who demand their dissolution.

www.monbiot.com

References:

1. Matt Ridley, 29th January 1994. He can cope on his own. The Daily Telegraph.

2. Matt Ridley, 1997. The Origins of Virtue. Penguin, London.

3. Matt Ridley, 2000. Genome: the Autobiography of a Species in 23 Chapters. Fourth Estate, London.

4. Matt Ridley, 28th March 1994. Let’s not get too steamed up about the greenhouse effect. The Daily Telegraph.

5. Matt Ridley, 6th November 1994. UN’s protection racket hurts the elephants. The Sunday Telegraph.

6. Matt Ridley, 9th December 1996. This, Mr Gummer, is why they all look just the same. The Daily Telegraph.

7. Matt Ridley, 6th January 1997. Recycling is a waste of resources – bin it. The Daily Telegraph.

8. Matt Ridley, 2nd September 1996. Sitting comfortably? Well, don’t, it’s not allowed. The Daily Telegraph.

9. Matt Ridley, 22nd July 1996. Power to the people: we can’t do any worse than government. The Daily Telegraph.

10. ibid.

11. No author given, 20th October 2007. Lessons of the fall. The Economist.

12. Scheherazade Daneshkhu and Jane Croft, 19th October 2007. Northern Rock’s BoE debt hits £16bn. Financial Times.

13. Sir Michael Darrington, 19th October 2007. Nationalisation would be the honourable solution. Financial Times.

Northern Rock and the "Free Market"

Martin Wicks — Mon, 24 Sep 2007 04:40:00 +0000

Will Northern Rock be bailed out by the public?...

Whatever happened to the ‘free market’? The one where companies get punished for their mistakes and self-regulation kicks in. It’s ironic that a government with Brown (a ‘proselytiser’ for globalisation and the wonders of the free market) at its head should step in to guarantee £28 billion of deposits in Northern Rock. The Business Editor of the Times complains that it is a virtual guarantee that if a private buyer cannot be found, “the bank will fall into public ownership”.

“But the creeping nationalisation of Northern Rock is, a humiliation for the British banking system and the Labour government. It is not a statement of strength from the Treasury, it is a salvage operation.”

The Times is careful to point out that Darling has not “reverted to socialist doctrine”. Of course, the government’s action does not add up to nationalisation, creeping or otherwise. Their calculation is that their action will stop the rot and restore confidence. However, if they are wrong, and Northern Rock collapses further it will be the tax-payer who foots the bill. And having given the same commitment in principle to other companies in the sector, it could be a very big bill indeed. No wonder the Governor of the Bank of England said today that this is an unsustainable position from which they have to work out an exit strategy as soon as possible.

For Cameron to say that the New Labour government is responsible for the situation is a bit rich, since it was Thatcher’s deregulation of the financial markets which helped to create a global financial system which is susceptible to rapid ‘turmoil’ which can have drastic consequences. However, the Iron Chancellor does bare responsibility to the extent that his ‘light-touch’ regulation allowed Northern Rock to lend at dangerous levels.

Those who praised Brown’s handling of the economy (especially trade union leaders who supported his ‘coronation’ in the desperate hope that he would throw them a few concessions) are looking a little stupid.

Those who believed that the growth of the service and financial sectors could produce a ‘sound’ economy were grossly mistaken. The greater the predominance of the financial sector in Britain, the more susceptible is the economy to the shocks in the global financial markets.

Brown’s ‘success’ as Chancellor was built on a mountain of debt, the growth of low paid jobs and worsening inequality.

In order to continue its spending spree the US economy has borrowed vast amounts of money from the rest of the world. The collapse of the ‘sub-prime’ market has had a global impact because of the complex ‘derivatives’ by which this debt is cut up into packages and sold on to others. The banks will not lend to each other because they fear that these derivatives are worthless, and they fear that they will not get their money back. Hence Northern Rock can’t borrow money in the ‘wholesale’ markets.

The ‘sound economy’ of which Brown boasts is in fact completely unbalanced. There are now less than 3 million workers in the manufacturing industry. The ‘market’ naturally leads to the concentration of wealth and resources into London and the South East. In some parts of the country there are houses and no jobs, in others jobs, but few can afford the ludicrously inflated house prices. Yet Brown insists that everybody should have the ‘right’ to own a house, whilst denying Councils the right to build Council housing.

In the immediate period events will depend on whether or not the inter-bank lending market can be ‘unfrozen’. But even if the situation is stablised in the near future there is no sign than the methods employed to create massive profits will be ditched. Both this crisis and the problems with Private Equity only serve to underline that the quest for very high profit levels threatens to create ‘systemic’ problems as a result of the globalisation of financial markets, whilst having implications for the ‘real’ productive economy.