Northern Rock: The inevitable state intervention
When the announcement to formally nationalise Northern Rock was finally made there was a burst of optimism from the Financial Times "The differences between this nationalisation and failed nationalisations of the past are clear. Northern Rock's spell in public ownership will be temporary. It will be managed at arm's length. ... Therefore anybody who suggests that the Labour government has gone back to the 1970s socialism deserves ridicule." (18/2/8)
It is not, certainly, a question of the Labour party ‘going back to 1970s socialism' since the Labour government is a government of the capitalist state and nationalisations are part of the defence of the national capital in the face of the economic crisis. The state apparatus is always and everywhere intervening in each country to keep the economy moving, or at least attempt to combat the worst effects of the crisis.
As for the 1970s, Rolls Royce was nationalised when it ran into financial difficulties in the development of an aero-engine. It was subsequently privatised again in 1987. So it's wrong to say that the idea of holding a company in the public sector while it is financially repaired is some king of modern notion that was never tried in the past. Even British Leyland was finally sold back to the private sector in the end - simply to get rid of the corpse that the business had become. It is not necessary to speculate about the future of Northern Rock to see that there are rather serious problems confronting the bourgeoisie's ambitions to rescue it in some way.
The Financial Times thought that "Once the bank is in public ownership it will be possible to look to the future. It may even be a bright future. The inflated £100bn-plus size of its loan book will have to be scaled back to reflect its deposit base, but Northern Rock has efficient operations and some well-located branches."
Amidst the buoyant optimism we have here the central point - the fact that the size of the loan book is out of proportion to the deposit base at the Rock. Has this got better over the five months since the famous scenes of depositors standing in queues outside the bank? No, in fact it has got worse - very much worse. When the government gave its guarantees to the depositors it stopped people queuing outside the Rock's branches, but people still pulled out more and more money. This is known, not because it is officially admitted, but because the money has turned up at the bank's competitors - for instance at the Leeds, Nottingham and Newcastle building societies.
The bourgeoisie say it is set on the idea that the Rock can be turned round. But there is the unfortunate point that, although the loan book of the Rock is relatively ‘good quality' (meaning that it is not all sub-prime mortgages) the security on which they rest is vanishing as the housing market starts to tumble. That is based on absolutely fundamental factors that no management of the Rock has control over - whether the management is from the private sector or the public sector. The Bank of England has issued dire warnings about current financial problems being the "the largest ever peacetime liquidity crisis."
The bourgeoisie are not deluded about the real extent of the financial crisis, and the government danced a minuet with Mr Branson and the other private sector bidders for the Rock essentially for reasons of publicity. The mandarins at the Bank and the Treasury have not lost their minds and are just as clever as they ever were. Obviously they would have been very pleased to dump the wreckage of the Rock onto anyone - as long as they were guaranteed to get back the money the state has put in. At the end Branson remained the only bidder because his team was the only one prepared to say that they would pay the money back in 3 years, rather than 5 as originally stipulated. Since that was a fantastic offer the mandarins obviously did not believe he could actually do it.
What has really changed since the 1970s is that the state's room for manoeuvre in the face of the crisis has radically diminished. Not only is the Rock still going down, it is taking the £55 billion of loans and guarantees from the state down with it. The Evening Standard thought that the new management put in place by the state would cut the number of staff working for the bank and that that would help find the money to pay back the loans. If they cut half the staff, as has been suggested, that would save £75 million a year - if one takes £25,000 as the average wage for the Rock's workers. On the basis of such a saving it would take 700 years to pay back the loans!
Under Brown the treasury pretended for years that state spending has been kept within the bounds of Brown's self-imposed measures of prudence in relation to the scale of the state's debt - by making ‘adjustments' to the calculations and taking key items of expenditure ‘off balance sheet' (effectively not counting them). All this ‘good work' on the accounting front has been completely destroyed by the size of the loans to the Rock. The Rock itself is of no importance - the government would put it into administration, except for the blow that would deliver to confidence in the banking system. But the finances of the state are of critical importance to the whole economic situation, since the state constitutes 40 or 50 per cent of the entire economy and the welfare of the rest of the economy is absolutely dependent on the stimulus provided by state expenditures.
The British state's room for manoeuvre to confront the present open phase of crisis has therefore been seriously restricted right at the outset because of the collapse of a second order bank. But this is the fire that the bourgeoisie have been playing with in the period of so-called ‘globalisation' - where growth has, to a very large extent, been a question of financial engineering. The state has to act as guarantor for all the financial chicanery that goes on in the ‘private sector'. And this phase of open crisis is just beginning as it spreads from the financial sector into the wider economy. Hardin 29/2/8