The financial storm battering the Northern Rock expresses not just the unravelling of the last 30 years of credit-led expansion but also a growing loss of confidence in both politicians and bankers. Every supposedly reassuring statement and action by chief executive Adam Applegarth, the Bank of England and Chancellor Alistair Darling has had the opposite effect. Every appeal for calm only lengthens the queues outside Northern Rock’s branches and depositors’ attempts to transfer money online. “Confidence” is an essential part of capitalism’s armoury and when it evaporates like it has done over Northern Rock, the entire economic system is affected.
The Bank of England’s unlimited, but expensive loan facility is a transparent but hopeless attempt to control the uncontrollable and keep people with mortgages tied into a lifetime of repayments. Yet the Bank – which only hours before Northern Rock asked for help said publicly that it would not provide lifebelts for troubled institutions - is only one of many central banks trying to keep their economies afloat. A global hurricane of imploding credit is, however, destroying all local defences. Despite recent globalisation, no unifying institution has been created which is able to regulate, control or protect the national components of the global economy from the destructive forces now unleashed.
The credit crisis that has swept the world’s financial markets may have been triggered by America’s housing crisis, but this and Northern Rock’s problems have deeper causes. For more than three decades the bloated financial markets provided increasing credit to service the growth of globalising corporations on the promise of interest payments and profits from increased sales. Consumption was pumped up by drawing consumers into debt.
America’s housing crisis signalled the limits of growth. Consumer demand was already faltering as wages were driven down, savings exhausted and interest rates rose. Inevitably, defaults on mortgage payments followed. Today Alan Greenspan, the former head of the US Federal Reserve, tells the Financial Times that the American housing market contains a large bubble and that prices will tumble. The same process is certain to hit the UK. The level of household debt in the UK surpassed the value of annual production for the first time this year and is unsustainable.
These are signs of an economic and social system that has failed and represents a political crisis for the New Labour government, under which personal debt has mushroomed. Now repossessions will accelerate as people find it increasingly difficult to repay mortgages. However, no-one should lose their home as a consequence of the failing system which exists to extract profit from dependence on the essential need for a place to live.
Northern Rock and all banks and former building societies involved in the mortgage business should be turned over to mutual status. The debts on the mortgages they hold will have to be cancelled, and new arrangements agreed and established through democratic debate. The millions of properties they hold as collateral against loans should be taken over by not-for-profit housing organisations. The owners and directors of Northern Rock could act as unpaid advisers before moving to jobs in the housing industry - on the building sites of a much needed crash programme of zero-carbon house construction. In this way, we could mark the start of a society organised to satisfy the needs of its members rather than the bankers and fatally compromised politicians who misled and lured people into this crisis.
AWTW economics editor