Saturday, 23 February 2008

Northern Rock and Nationalisation

I acknowledge that I am pretty tardy with this posting but illness has kept me away from my blog. My irritation about comments on the nationalisation of the Northern Rock Building Society last week remains sufficiently high to prompt me to cast off another tablet of lead about this issue. The main thing that rankled me was that the Conservatives said that the nationalisation showed that the Labour Government could now not be trusted on the economy. I would accept this as a criticism if Northern Rock had got into trouble whilst it was owned by the government, but the difficulties it encountered were engineered by those running the building society, not the government. Even the Conservatives have had nothing to complain about the low inflation, reasonably low unemployment and not too bad growth of the UK economy since the 1990s. What you can argue is that the government has drawn been unwilling to allow the harshest consequences of the undemocratic capitalist economy we live in, biting. Northern Rock has 1.4 million people who save with it and 0.8 million people who have mortgages with it. If the government had allowed the building society to collapse these people would have all lost their money. This would have led to a dent in expenditure at a time when the Bank of England is concerned about slowing consumption. It would have also thrown all these borrowers into the market desperately looking for mortgage replacements. The nature of many of the products that Northern Rock sold meant that many customers would have found it difficult to relocate their mortgages. Repossessions are currently 20% higher than they were in 2006; 27,100 houses were repossessed in 2007 compared to 22,400 in 2006 and 10,260 in 2005. This is lower than the 70,000 per year in the peak of the 1990-3 slump, but is clearly a bad sign for the British economy which is so focused on house ownership. In addition, Northern Rock, though it now has branches across the UK is heavily focused in northern England and so the impact of the first British building society collapse since 1892 (The Liberator Permanent Benefit Building Society, at the time the largest one in the UK, wrecked by the activities of its founder) would have fallen more heavily in some towns. The other thing was the impact of seeing queues of people outside Northern Rock branches in September 2007 when the building society's problems began, some crowds of whom had to be dispersed by police, was not a good image, being to reminiscent of the crash images of the 1920s and 1930s.

Anyone who knows people with mortgages could have told you ten or fifteen years ago that Northern Rock was going to be in difficulty some day. The trouble is that bankers and politicians do not listen to ordinary customers. In the 1990s I never heard a single good word about Northern Rock from anyone I knew who had a mortgage with them. There were constant complaints about their customer service and the poor level of information that they provided. Consequently for the past two decades, in an increasingly complex mortgage market (now you can get mortgages from all sorts of businesses including supermarkets), the only way they were going to win and retain customers was through making more and more attractive products. This is how they ended up with the extremity of 110% mortgages. Anyone could tell you such products were a high risk. By definition they appeal to people who are less financially secure. In addition, with the rapid move away, in the mid-1990s, from endowment mortgages marketed so aggressively in the 1980s, anyone would have advised you to avoid any mortgage which did any more than help you secure your house. Of course, in an economy which I have highlighted time and time again emphasises house purchase as the means of effectively becoming a citizen and making any provision for your future security, of course there were people willing to gamble with such products. At the start of 2007, one out of five new mortgages were with it. The government could have been criticised for not restraining Northern Rock from pandering so greatly to this market or at least doing so with insufficient reserves and back up. In particular Northern Rock borrowed far more from the financial markets than its competitors and was far less wedded to actually how much people were saving with it, which in the past was the basis on which building societies operated. In 2005 the government decided the British economy could not tolerate the collapse of any of its banks and so it would have to intervene if one appeared to be in trouble which is why Northern Rock got £55 billion in loans and guarantees at the end of last year.

What the Conservatives and people in the financial sector want is for the government not to spend money assisting failing businesses and yet they do not want it either to impose regulation, they complain about the nanny state. What they want is to charge around making billions of pounds of profit and for ordinary people to lose their houses if the company makes a blunder. In a democracy the government cannot allow so many ordinary people to suffer and in an economy where housing is such a bedrock for other activity, really the bankers have to face the fact that however they feel about making the ordinary person pay it could wreck everything for them. I believe the government should have stepped in and having taken the decision in 2005 that it could not allow a collapse to have severely reined in the very risky behaviour of Northern Rock rather than allow them to make excessive profits for another two years that are now costing everyone dearly. We are not bailing out the ordinary borrower, we are effectively subsidising the income of incompetent bankers, they should be the ones to suffer.

Another problem is the death of mutual building societies. Mutual building societies were non-profit making credit bodies and this made them distinct from banks. As they had no share holders they could offer better terms and rates of interest but often lacked the facilities of things such as current accounts. In the wave of privatisations of the 1980s, from 1986 onwards building societies were allowed to turn themselves into banks. In 1989 the Abbey National was the first to change to a bank and most other building societies made the change in the following years, in many cases because those with accounts got a pay out of a couple of thousand pounds at the change over. In 1995 the Cheltenham & Gloucester Building Society became a bank and was aborbed by Lloyds Bank, the first time a converted building society had been so taken over. A milestone occurred in 1997 when the largest building society in the UK, the Halifax became a bank. All building societies after 1986 could act like banks with the types of accounts and other products such as insurance that banks offer, it did not mean they had to stop being mutual to do that, it is just as with all privatisations, people wanted short term gain at the expense of the economic stability of the UK.

Now there are very few mutual building societies, the Nationwide (with 10 million customers; £75 billion in assets in 2004) is the largest. Ironically many of the remaining mutuals have characteristics of the first building societies in being focused on a region especially in northern England. However, being mutual does not mean they are not commercially successful: Coventry Building Society (1 million customers: £9 billion assets in 2004), Leeds & Holbeck (8th largest building society; 600,000 customers; £5.3 billion assets 2004), Newcastle Building Society, Britannia Building Society, Skipton Building Society, Scarborough Building Society, Nottingham Building Society, Buckingham Building Society are the others (Leeds, Holbeck, Skipton and Scarborough are all in Yorkshire in North-East England; Coventry and Nottingham are old industrial towns in the Midlands). Not being driven by shareholders who want profits and good returns on their shares rather than their savings, distorts the policies that 'bank' building societies adopt. Everyone who has an account in a mutual building society is effectively a share holder and votes at the general meetings. This means they can stop the building society being taken over by people focused on a quick return and keep it on track with doing what building societies are supposed to do which is providing well founded credit to its members primarily to buy houses. If Northern Rock had not become demutualised in 1997 I doubt it would have got to the situation it is in now.

The other thing is about nationalisation. Nationalisation is the government taking anything from a majority share holding to total ownership of a company. There is a whole range of models of how nationalised industries can be run, but in the UK we tend to do it at 'arm's length' leaving business decisions up to the boards of the nationalised companies and often not compelling them to fit in with broader economic plans for the country. This contrasts sharply with other countries who have a so-called 'mixed' economy notably France which used nationalised industries to shape and stimulate the economy after the Second World War. Weaknesses in nationalised industries in the 1970s, mainly because they were heavy industries whose time had passed in Western Europe anyway, tarred the approach with a negative view. In addition, the British government seemed to put poor business people in charge of these companies, mainly because competent business people have no patriotism at all only personal greed and want ridiculously high salaries that governments cannot afford. In the 1980s-90s all the nationalised industries in the UK were privatised generating huge profits for already wealthy people and leaving us with poorly run, fragmented industries such as all the railway and utility companies which I often complain about.

Nationalisation is most associated with Labour governments but was started even before the Labour Party existed in the UK: effectively the economy of India was nationalised in 1857-8 when it was taken over by the British Government from the control of the East India Company; 1875 - Suez Canal Company, 1916 - parts of the alcohol business, 1926 under the Conservatives electricity was nationalised, 1927 - again the Conservatives - British Broadcasting Corporation (BBC) - state run radio and television body set up (the BBC was only a 'Company' for some months in 1926 despite what a lot of novelists and historians write in their books), 1933 - National Government (a coalition dominated by Conservatives) - London Transport, (1938 - the royalties from coal, the industry was not nationalised until 1946), 1939 - National Government - British Overseas Airways Corporation. Between 1946-51 the following industries were nationalised: coal, Bank of England, electricity, Cable & Wireless, railways, canals, Thomas Cook & Co. (travel agents), road haulage, hospitals, gas and steel. All former owners were bought out, the companies were not seized the way they were in Communist countries. At its peak only 20% of the economy was nationalised, but the focus was on the so-callled 'commanding heights' things which were handled best with a national perspective and which could direct the rest of the economy in healthy directions. However, unfortunately, they were left too free and there was no overall plan for the economy. Though it is interesting to think as a 'what if?' if things like coal and the railways had remained fragmented how much worse the British economy would have been in the 1950s and 1960s given how poorly especially coal had been run before the war. Similarly with only private hospitals the productive health of the country would have been much poorer. Even Winston Churchill, the Conservative leader defeated in 1945 had had plans for nationalisations in line with what the Conservatives had done in the 1920s and 1930s.

The problem is that from about 1967, when steel was nationalised for a second time (it had been privatised in 1953) onwards nationalisation was about saving companies on the verge of collapse, such as Rolls-Royce engines in 1971, British Leyland cars in 1976 and a number of collapsing aerospace and shipyard companies in 1977. The bulk of these companies were beyond saving and to some extent they were taken over to slow the loss of jobs. However, they weighed down the government's expenditure and suggested that nationalisation in itself was bad. There was no attempt to really use them to stimulate the economy. Under Tony Blair the government shied away from anything that seemed to associate his regime with what was deemed 'Old Labour' attitudes and instead encouraging the 'fat cat' capitalists who as we know actually now run the country. The trouble is if nationalisation is always really about a rescue package then it will always fail. The government should have taken over Northern Rock in 2005 and used it to begin stabilising the housing market and to some degree regulating house prices by example. Northern Rock was taking about 20% of new business so by say limiting the lending, then house prices could have been reined in without sending them into collapse and houses would still be within the reach of more people. Of course the capitalists do not want the risk of nationalisation hanging over them, it annoys them when they cannot allow their greed to run unfettered through the lives of us ordinary people who count for nothing in their books except how much we can give them in terms of fees, our happiness is nothing in their excessive Social Darwinist economic view. Nationalisation will always fail when it is used as the last resort. Capitalists need to pay for their blunders and greed, however, not us. It is clear from the British Gas results, a five times increase in their profits their year and a 15% increase in their prices, that we are being bled dry for the insatiable greed. There is clearly a cartel between the 6 energy providers in the UK with no more than a £13 difference between the most expensive and the cheapest, and yet no-one is willing to nationalise fuel provision nor even to enact anti-trust laws of the kind the USA has had for ninety years. Utilities and the railways need to be nationalised now and not when one of the greedy companies loses its profits gambling with our interests.

The government could have acted faster on Northern Rock, but its biggest failing is to be unwilling to rein in even to the slightest degree the greedy billionaire parasites of the British economy.

P.P. On reflection, I realised that my sense that I was moving in an anti-capitalist direction was unfounded. No-one would have accused Clement Attlee or Herbert Morrison or Harold Macmillan of being anti-capitalist and what I am advocating is nothing different to the lines they took on having a mixed economy. In fact it can be argued that it would be a more efficient form of capitalism than the current pattern in which equity funds are simply stripping away assets from successful businesses (Pret-a-Manger is currently in line to be abused) for the greed of the super-rich. Directing business people to act in a responsible way with concern for the rest of the system in which they are operating will actually sustain capitalism, otherwise in a couple of decades there will be no businesses actually producing products or services and equity funds simply fighting to eat each other up. Putting the 'commanding heights' of the economy into state control allows other policies to be pursued such as those around green issues like efficient use of fuel and recycling more effectively than regulations and fines.

The trouble is we keep being told that the economy of the super-rich unfettered by any regulations or concern for the 99.9% of the population who are not super-rich, is the only acceptable form of capitalist economy, that is rubbish and people who are pro-capitalism need to challenge that portrayal.

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