Monday, February 18, 2008

The least worst option

Not surprisingly, the Tories are trying to have it both ways over Northern Rock today. One the one hand, they criticise the nationalisation of the Rock as a "disaster for the taxpayer." On the other, they criticise Gordon Brown and Alistair Darling for spending six months arriving at that decision. The two don't actually add up.

The whole reason the Government has spent the last six months exploring every other conceivable option for the future of the stricken bank was precisely because they were desperate not to have to nationalise it. For this reason, I am inclined to believe Alistair Darling when he says that the deal represents the best value for the taxpayer. Because if it didn't, they sure as hell wouldn't have done it for any other reason.

Let's also dispose of the idea - championed by Guido Fawkes here and here - that this is primarily about saving North-East jobs. If that was the case, the government would presumably have nationalised Siemens and Fujitsu when they crashed with significant impact on the regional labour market in the late 1990s.

The reason they didn't, of course, was because Siemens and Fujitsu, although large regional employers, were not banks, and there was no risk that their collapse would cause instability to spread throughout the country's entire financial system, which is the reason Messrs Brown and Darling have acted as they have done in relation to Northern Rock.

In fact, after ploughing through half a dozen Tory blogs claiming this is a worse political catastrophe than Black Wednesday, the death of Dr Kelly, and cash-for-honours rolled into one, I was somewhat relieved this afternoon to come across a "counter-intuitive" post from Hopi Sen in which he makes the following prediciton:

Northern Rock will end up making the Government money and be sold off at a significant profit (or have made a net contribution to public sector finances) before the next election.

The point is, there is actually just as much chance of this being right as the Tories' prophecies of doom. The answer is, we don't know, and we probably won't know for several years yet.

The Tories will doubtless go on claiming that this shows Labour has lost its reputation for economic competence, that Brown is a dud, that Darling should be sacked and so on. It may mean all of that, but it could also turn out to be the most brilliant piece of financial management in recent political history.

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12 comments:

Stephen Rouse said...

The root of all this trouble can be found in the unintentionally hilarious “Origins of Virtue” by Matt Ridley, science populariser, right wing ideologue and erstwhile Northern Rock chairman. Ridley tries to argue that Friedmanite economic theory is somehow hard-wired into our genetic make-up. His chapter on trade has the revealing sub-title ‘in which exchange makes two and two equal five’. There in a nutshell you have the basis of neoliberal economics and of Northern Rock investment strategy under Ridley.
The Rock was abetted in its folly by the financial authorities, neutered by deregulation, who completely failed to see the gathering storm. The shareholders, for whom it is hard to feel much sympathy, appear to have happily collected their dividends during the years of plenty without asking hard questions as to how a provincial building society suddenly became one of the nation’s five biggest lenders. And following the Rock’s collapse last autumn, the much-vaunted ingenuity of the private sector failed to come up with a viable rescue plan.
Yesterday has, unfortunately, already been spun as the day Labour’s economic reputation died. It should have gone down as the day when the idiocy of 30 years’ fetishisation of the free market was finally exposed.

The Daily Pundit said...

Ironically, it's the Tories and particularly George Osborne who could suffer a backlash from this. They've been all over the place since it began and they're still all over the place.

jaymason said...

I think most people realise that trying to'blame' the tories is a non starter. From my admittedly limited understanding what's caused the entire bugger up is that money has been too cheap and that the regulatory regime instaled by our ' beloved' PM didn't work the first time they came under stress. We now have Alistair Darling paying someone 90K a month after he has just had a go at the city for excessive bonuses. The foreign press think that the UK govt has made a complete pigs ear of the whole thing, and the UK goes further down the toilet of nulabours making.

MorrisOx said...

I think you're right, Paul, in the sense that the Tories are contributing political heat and hardly any light to this debate, but it is a brave man who dresses this up as a good outcome.

A good outcome, frankly, would have been for the Government to have let Northern Rock face up to a nemesis of its own creating. That would have been far cheaper in the long run than what we have now, I doubt it would have made any difference to jobs which are now almost certain to fade away, and the banking system and the ill-advised speculating public would have learned a very hard lesson about betting on money.

I doubt this will make the taxpayer any money. The quality assets in Northern Rock are in its mortgage book and making money would depend on house prices starting to climb significantly again - which is unlikely to happen for 2-3 years. By the same token, the taxpayer seems unlikely to lose a packet because the value of those mortgage assets is unlikely to hit the deck.

The cost we need to watch here is the management of Northern Rock under government control. 'Specialist advisers' about is potential disposal will have earned a packet already, and all they are doing now is, essentially, seeing how it can be broken up at something other than a knock-down price.

But Darling's finest hour this ain't. A political imperative driving what should have been a straightforward business decision was trouble waiting to happen. One more economic 'event' and Darling will be on the way out.

There are plenty waiting to happen.

Vicarious Phil said...

Jack Straw must be pleased the PM didn't take your advice and make him Chancellor! Watching the news last night I was struck by how poor George Osbourne is, considering how much trouble the gov't are in over Northern Rock the shadow chancellor just doesn't impress. If Vince Cable was better looking Osbourne would be toast!

Anonymous said...

It could indeed make the treasury money, however Gordon has given everyone a £4000 stake in a bank that overlent for many years. These mortgages at up to 6 times income and 125% LTV are secured on their homes, which according to all the surveys are now worth less than in september. Would you want to own this company at this stage of the housing cycle?

I wouldn't

lettersfromatory said...

"I am inclined to believe Alistair Darling when he says that the deal represents the best value for the taxpayer."

I disagree. I think the Labour strategists think this will cause the least political damage to the party, rather than looking out for the taxpayer.

David Gladwin said...

The mistake was stepping in to bail out Northern Rock in the first place. Once that happened, the rest of the events were pretty well set in train.

The country's entire financial system - propped up as it is on unsustainable debt - needs to endure a period of instability.

A harsher reminder that the whole house of (credit) cards is in a dangerous state is long overdue, and ought to discourage some of the reckless lending that got Northern Rock into crisis.

Which brings us neatly back to the point. Nobody will ask the shareholders and executives of Northern Rock to pay back their dividends and bonuses from previous years, when it was still possible to paper over the cracks. They've had their money already.

A Chancellor with any balls would have left them to the wolves, and then held up their pelt as an example to others.

The Half-Blood Welshman said...

This does indeed represent best value for the taxpayer, and probably the best way forward for customers (especially savers) as well.

However that, as Vince Cable has been yelling at the top of his lungs, has been true since about October when the loans started becoming really massive.

The real problem for Darling and Brown is NOT that people will object to the naitonalisation - but that they WILL object to all the shilly-shallying that preceded it. It just looks indecisive at best, actually corrupt (junkets to China with Branson anyone?) at worst.

I fully agree that the Tories can't exploit it - Osborne is not a particularly strong shadow Chancellor, and he's certainly offered no better alternative - but the damage to the image of the government is probably profitable enough to them.

As for Nick Clegg, he must be thinking all his Christmases have come at once - his biggest beast has been all over the airwaves this weekend, doing no end of good for his party. And since the Lib Dems are Labour's main rival in the North-East, where this is likely to be a hot topic, that's not good news for the government. So whether it's brilliant finanacially or not, it's political dynamite.

Sorry for such a long comment, but it's rather an involved topic!

Anonymous said...

Northern Rock would have to default on 100% of its loans for the 2k figure to be realistic.

Noone is suggesting NR lent recklessly, they just financed the lending badly.

Given NR was the 5th biggest mortgage lender, its highly likely the treasury will make a profit from nationalisation.

Especially when you consider that the Bank of England pays zero interest on the loans it has offered, as the money doesn't really exist, its just underwrited by printing extra fictional money at the Bank. So the base rate of interest NR were paying on their loans is all the Banks profit too.

Matt Buck said...

> Noone is suggesting NR lent recklessly, they just financed the lending badly.

Really? 125% mortgages anyone? Is that loan book really as solid as we are told it is? Are the govt and the 'arms length' management going to allow any public scrutiny of the assets we have just formally underwritten. I'm not even quibbling with the decision to nationalise, just curious as to what it is we have finally nationalised...

MorrisOx said...

Some of the comments on here seem at variance with the facts.

This has so far cost a fortune in fees and will continue to do so.

The idea that the Treasury (i.e., the taxpayer) will end up with a surplus is extremely ambitious thinking (especially when the Government has yet to explain the status of Granite, Northern Wreck's offshore mortgage vehicle).

And what's good about a crisis where the only conclusion we appear to have drawn is that a Government in a tight corner will throw money at a problem caused by someone else?