Ten Years After the Northern Rock Crisis: and the Economy is in a Worse Condition

We are now ten years away from the date when a still-under-rated minister, Alastair Darling, took the decisive steps that 'rescued' Northern Rock; and, with it, the economy. I referred yesterday to the fact that some five years after the crash a few students in the University of Manchester dared to challenge the fact that their teachers in Economics classes could not explain [within their own intellectual universe] how the crisis happened, precisely what constituted the crisis, and why they had not adjusted their 'analysis' of the economy in the light of a shattering, cataclysmic event. A second set of questions, soon to be posed and left unanswered, was how and why all these clever professors had not seen the disaster approaching.

Off her own bat, the Queen posed the same question on a visit to the London School of Economics, and received no immediate response. A few weeks later a group of professors sent her a totally unsatisfactory sequence of exculpatory piffle, which satisfied no-one. The Queen later put the same question on a visit to the Bank of England; and because they had no answer to the challenge why they had not anticipated the crisis - and thus been able to avert it, or mininise it - they could not give any sort of satisfactory response.

The Econocracy, the Manchester students' term to describe the wrong-headed devotees of free-market Economics, cannot formulate an answer within their terms of reference: I have frequently damned them in this blog, and set them aside again today as being potentially part of a solution to the mess that their dogma created when it was embraced as deep state policy by the Thatcher gang. To anybody who questions the use of the term 'gang' I respond that the tight group of people who advised Mrs Thatcher and her guru Keith Joseph, several of whom were ex-communists, intended their ideologically-driven policies utterly to destroy the mixed economy no less completely than the Bolsheviks had planned to destroy capitalism.

I have perhaps not stated this point strongly enough in this blog so far. It lies at the root cause of the crisis of 2007-9, and thus it still overshadows the British economy, and damns millions of people to diminishing real incomes as they drag out their days on minimum wages in jobs with barely measurable productivity and negative productiveness. Behind the relatively few specific policies that are still recognised as having been 'Thatcherite' [such as selling council houses] there lay a serious ideology which informed the 'deep policy' that lay behind everything that they did. This dogma is the unconditional belief that 'free markets' release the inventiveness of the brightest and best of the rising entrepreneurial cohort: and that their spontaneous actions would give sufficient positive momentum to the economy that hundreds of thousands of redundancies and billions of poundsworth of plant and equipment that were scrapped [or just left underground] could simply be ignored. If you believed this fervently enough, no specific policy and no government investment would be needed to free self-centred components of the economy to expand at an unprecedented rate.

Of course, this ideology comes up against a mass of real-world inhibitions: laws against defrauding or cheating fellow-citizens, laws controlling dangerous substances, the requirements of national defence, the absolute belief of the public that there must be a national health service, the entrenched tradition that children should attend school, and many more. While telecommunications, gas, water and electricity supply were privatised quickly, many areas of the economy could not directly be attacked in the first wave of Thatcherism. Meanwhile the flow of taxation and government spending had to be maintained to keep the publicly-recognised essentials in being; though plans could be made to privatise hospitals and schools; and other public services were required to cut their real cost to the state. The government made a virtue of shutting down the most heavily-invested material industries [where the state had been the prime investor for decades: in some cases for centuries] such as shipbuilding, iron and steel, shipyards and coal mines, regardless of the damage that was done to the economy.

Much of the material economy went into a state of shock, as protections against competing imports were removed and supply chains from foreign countries had to be accessed because British suppliers had disappeared. When the mines and shipyards and steelworks closed, their suppliers were ruined also, and many supply-chain firms failed; which meant that across much of industry there arose   a need to import components that had previously come from the British firms whose major customers had been taken out in accordance with the prevailing ideology.

The one area where buccaneering entrepreneurs could thrive was in banking and finance, where many controls were removed precisely at the time when the emergence of sophisticated computers became available to firms; while the regulators [most notably the Bank of England] did not develop the means to understand what was happening. That was the fruitful field on which the the crisis, to be recognised by ministers in 2007, was developed over twenty years from 1986.

[Next installment tomorrow]

Deserving Bank Shareholders?

The 'rescue' of various banks in the crisis of 2007-9 took various forms; partly depending on how far the crisis had run when the individual firm faced insurmountable difficulties, and partly depending on the perceived degree of blame that was laid at the door of the organisation's management.

I am moved to write this piece today because former shareholders in Northern Rock - a historically worthy building society based in north-east England - got nothing when their firm was taken over and dismembered by the government; while Lloyd's and Royal Bank of Scotland kept their names and their structures, and the shareholders retained some of the equity under Treasury tutelage. The Northern Rock shareholders have retained their organisation, and while some former shareholders have accepted their losses and moved on, a hard core has revived the claim that as the government will make a net 'profit' from selling off parts of the firm, it should now reimburse some of the losses that individuals suffered.

This is a technically complex, legally difficult and morally ambiguous area for debate, and I will just make two basic points.

One is that Northern Rock and the Royal Bank of Scotland were both based away from London, and both had rather buccaneering chief executives who became heroes in their regions. Although RBS had a nationwide shareholder base, largely due to the absorption of other major banks into the group, the board was largely focused in Scotland. It only became apparent how far off the rails RBS was going when a 'takeover too far' collapsed precisely as the liquidity crisis hit all the banks. The urgent need of the bank for a rescue of very large proportions placed it abjectly at the feet of the government, and ad hoc measures were taken, of necessity. It was decided that such a large entity could not be made to vanish, as Northern Rock was allowed to disappear: hence the restructure of the RBS conglomerate is still ongoing.

The principal asset of Northern Rock was a large book of mortgages on residential properties; which has over the succeeding years been sold profitably; largely because the policies of almost-zero interest rates and quantitative easing have resulted in a steady rise in house prices so that the assets of the old building societies have been consolidated in market 'value'.

The key point about the need to 'rescue' Lloyd's is that this was only necessary because Lloyd's board - without an time for consultation with the shareholders - had agreed to rescue Halifax Bank of Scotland, a conglomerate of a massive building society and a Scottish bank that had pursued similar policies to those of RBS. Lloyd's conservatively-managed balance sheet could probably have survived the storm without the HBOS increment of problems: so the Lloyd's shareholders were the least disadvantaged in the restructuring that was judged to be necessary in 2008-9.

The Northern Rock shareholders should have been more vigilant as the company's lending became more reckless: instead they were hubristic. Similar complacency affected the RBS shareholders until it was too late to 'save' the firm. The HBoS merger was dumped on Lloyd's shareholders by a board that was anxious to help the government. Lloyd's wide constituency of shareholders had no say in the decisive action that precipitated near-bankruptcy. RBS shareholders were complacent through a decade of increasingly reckless management. Northern Rock shareholders [mostly] gloated in the national success of their local bank until the truth was borne in on them. These attitudes have more-or-less fairly been rewarded since the crisis.

And, of course, Barclays shareholders are still taking action to challenge the possibly-illicit actions that their firm took to stay technically solvent.

These issues will run and run, but so far I think that rough justice has been done.