Desperate times, desperate measures. That’s the only explanation for New Labour’s emergency decision to underwrite every last penny of depositors’ money in Northern Rock – and do the same if any other lender looks like going belly up. The statement was intended to restore confidence in the shattered Northern Rock and stop the run on the bank from spreading to other lenders like Alliance & Leicester, whose shares also plummeted yesterday.
But if the government ever has to put its pledge to the test, the sums involved would actually bankrupt the state, such is the dire nature of the global financial crisis and its impact on Britain. Northern Rock alone has £23 billion in deposits (the maximum they were obliged to return to each investor is just £30,000 should the bank collapse). So New Labour effectively pledged to nationalise the bank as a last resort not so much with depositors’ interests at heart as those of the banking sector, on which this government has come to rely.
The coincidence of the economic and political crisis is self-evident. Last week, Chancellor Alistair Darling called for a return to “old-fashioned banking” methods. In the wake of the first run on a major bank in Britain for over a century, Darling promptly abandoned his position last night. He was forced to act when disbelieving depositors simply ignored statements that the Northern Rock was as solid as it name suggested and continued to queue from dawn to dusk to take their money out. Withdrawals are estimated at £3 billion in three days, equivalent to an eighth of the bank's deposits. Yesterday its shares dropped 155p, or more than 35%, to 283p, from a £12.58 high in February this year.
In fact, the bank’s fortunes have been heading southwards since the crisis on world financial markets got under way in the summer. Over 70% of Northern Rock’s liquidity is dependent on raising cash on wholesale money markets. These markets have dried up because of the contagion of bad debt that emanated from the United States, where the bottom end of the housing market has collapsed. Paradoxically, attempts to sell Northern Rock off foundered when would-be purchasers were unable to raise the money because of the same credit crunch. Today the Bank of England pumped over £4 billion into the money markets in a futile attempt to ease the credit log jam, again reversing a decision of only last week that intervention would serve no purpose!
While the government prattles on about the “fundamentals” of the economy being sound, the opposite is the case. The huge expansion of public and private debt leaves the economy exposed to the chill winds blowing through the financial system. The loss of confidence is forecast to lead to less spending and more saving – probably under mattresses. Mortgages are becoming harder to get and house prices are beginning to fall. The financial services sector – which is the mainstay of British economy – is certain to contract in the wake of the credit crunch, leading to rising unemployment.
At the heart of the crisis is the fact that the recent period of corporate-driven globalisation was funded by an expansion of credit, leading in turn to an international financial system where loans are traded in “debt packages”. Many of these are now what as known as “distressed” or “non-performing”. In other words, they are worthless. What is now threatened is a massive, global destruction of real, physical assets – property, factories, offices as well as pensions. No amount of government guarantees or attempts to bail out banks can put Humpty Dumpty together again. The present economic and political system is clearly unsustainable and not-for-profit alternatives are urgently needed.
AWTW communications editor