The Myth Of An Alternative To The Bank Bail Out

Last month I was particularly angered by a comment from Defence Secretary Dr. Liam Fox when he said that the main reason for the cuts in defence expenditure was no fault of the coalition government rather it was the consequence of the sustained damage Dr. Gordon Brown had inflicted on the economy as prime minister 2007-10.  Among leading Conservative politicians, Fox has been one of the most vocal in attributing the blame for the UK's economic problems on the previous Labour governments, more so even than Prime Minister David Cameron and Chancellor of the Exchequer, George Osbourne.  Cameron and Osborne use the large deficit created by bailing out the banks at the onset of the recession as the excuse for their harsh public spending cuts, which would have been imposed even if the UK was in a boom because the current batch of Conservatives believe that the state is too large and needs to be culled as abruptly as possible.  Fox, however, takes it a step further and peddles the idea that for some reason Brown and his government deliberately 'wrecked' the economy for some unknown motive.  Fox, in many ways, is a throwback to the 1970s and 1980s seeing some Communist conspiracy at the heart of British government trying to do the worst for the decent British public.  The reality was that whilst governments do and pursue a particular agenda, and Brown less vigorously than the prime ministers that bracketed him, a lot of their activity is responsive rather than proactive, particularly in the age of the globalised economy when the demand from copper in China leads to thieves in the UK disabling electricity sub-stations and sections of railway in order to get the scrap copper.

All governments say that they could have done things better than their rivals.  There is an implication in everything that Cameron, Osborne, Fox, et al say, that if, for example, rather than Tony Blair handing the premiership to Gordon Brown in June 2007, there had been an election and David Cameron had come to power, then the banking crisis and the recession which came the following year, would have been handled so differently, so much 'better', if Fox is to be believed, that, in fact, we would not now be facing such a large deficit and the consequent 'need' to slash so much of public service.  So let us look at what the Conservatives might have done differently.

The first thing to establish is what would have happened if the government had done nothing.  Even before the global recession had started, in the UK, the Northern Rock bank ran into problems.  It lent 18.9% of all of the mortgages in the UK and handled deposits of £24 billion compared to loans and assets of £113 billion.  In the summer of 2007 it found it difficult to borrow money to cover its lending.  As the US sub-prime market began to stagger, lenders became reluctant to lend on any mortgages even though British lending was generally on a far more restricted basis.  I was not surprised that Northern Rock was struggling having had much anecdotal evidence of its poor customer care combined with its aggressive marketing of products including very high percentage mortgages; this has raised its market share from 14.6% in 2006.  Rapidly fading faith led to a 'run' on the bank with £1 billion in deposits being withdrawn on 14th September 2007. This was the first run on a British bank for more than a century.  To stop the bank from collapsing, the British 'lender of last resort', the Bank of England lent the company £27 billion and in 2008 bought up £3 billion of effectively worthless shares in the company.  In February 2008 the bank was de facto nationalised. 

At least ten other offers to buy the bank were rejected because these potential owners were unable to repay the public money loaned to the company.  Interestingly, the US company Lehman Brothers which was soon to collapse in a spectacular way was one of the bidders.  Others were equity funds such as Terra Firma Capital Partners, J.C. Flowers and Ceberus, investment companies like Olivant and other banks like Bradford & Bingley and Lloyds-TSB.  If Terra Firma's bid is anything to go buy, some of the equity fund purchases would have been de facto asset stripping processes.  Interestingly, before Northern Rock was effectively taken over by the state 40% of its best business accounts was transferred to a company called Granite based in the Channel Islands which have different tax laws.  Though Granite does not receive new business, this effectively meant the cream of the bank's business (and profit potential) remained free of state control.

Now, if the state had not stepped in, then we would have seen the run on the bank continue, reducing the amount of deposits even further than before in relation to its loan commitments. There was one incident in which one bank manager was barricaded in their office because two customers were unable to withdraw their £1 million after the online banking facility of Northern Rock collapsed.  It is likely that violent scenes would have continued as the bank would have found it impossible to cover all the withdrawals with the relative low level of reserves it kept. At this stage the bank would be compelled to foreclose on its mortgages, i.e. insisting lenders immediately repay their loans or lose their homes to the bank.  This would not have helped the bank much as they would have had to dispose of the property quickly to recoup funds and in many towns the housing market would have been utterly disrupted as numerous properties were auctioned off.  As it was some borrowers, including charities, accused Northern Rock of pursuing aggressive repossession especially in 2007-8.

Some borrowers could have transferred their mortgages to other banks but this would have brought pressure on to them as they would increasingly have faced the challenges Northern Rock had already faced to raise loans to cover the mortgages they lent.  Thus, even before the main recession started, not bailing out Northern Rock could have become a crash in the UK economy. The issue for many was that the total support to Northern Rock came to £100 billion which was added to the National Debt meaning it was equivalent to 37.5% of the GDP (Gross Domestic Product) close to what is seen as the highest permitted level of debt by a state. 

I suppose that the difference that the Conservatives would have done, is being so averse to nationalisation, they would have allowed Northern Rock to have been sold to another bank, with no guarantee that the public funds put into the bank would ever be returned.  Under the de facto nationalisation, by August 2008, the bank had already paid back £9.5 billion of what it had been given, so reducing its part of the National Debt.  It seems unlikely, given that so much Conservative support comes from property owners that they would have allowed Northern Rock to collapse, it held too large a market share.  Thus, there would have been addition to the National Debt just in the way the Conservatives complain about.  In addition, there approach would have meant that the government would not have had a chance of ever seeing the money it had provided returned at some date in the future. 

The key difference would have had to have occurred back in the 1990s when regulation of banks and The City financial bodies was far too lax.  The Blair government like the Major and Thatcher ones that had preceded it, seemed beholden to the financial institutions and was happy for them to act recklessly and earn big profits.  The 'invisible' trade of financial products has been Britain's strongest industry since the 1980s and no prime minister seemed to have the will or the wish to temper the behaviour of not only merchant banks but also high street banks too.  The conversion of mutual building societies into banks after 1986 and their focus on shareholders rather than customers did not help the situation in the mortgage sector, because they were prone to take more risks.  A lot of this could be foreseen, the Bank of England had apparently been working through scenarios of such difficulties as early as 2004 and like many others saw Northern Rock and Halifax/Bank of Scotland (popularly referred to these days as HBOS) as likely candidates.

The ongoing sub-prime mortgage crisis in the USA and the subsequent tightening of loans to banks meant that many UK banks beyond Northern Rock began to experience crises.  The Bank of England offered £4.4 billion in relief in September 2007 and it was drained by banks within hours. In October 2008, the Bank of England offered £37 billion to Royal Bank of Scotland (RBS), Lloyds TSB and HBOS who were struggling to cover their loans and certainly to grant new ones.  Would the Conservatives have refused to offer such funds to the banks and so, having avoided the collapse with Northern Rock, have seen even greater problems as these banks collapsed?  RBS had assets of £2.5 trillion in December 2008 and Lloyds Banking Group £1.195 trillion, thus the scale of their demise would have made that of Northern Rock seem minor.

RBS had had difficulty in raising funds from April 2008 and in the end first 60%, in March 2009 70% and in November 2009, 84% of the bank was taken over by the state.  RBS has been shedding assets since early in 2008 but did not close its tax avoidance department until March 2009 and in December 2009 stood by plans to pay £1.5 billion in bonuses to staff in its investment arm.  Lloyds-TSB already an amalgam of an old bank and a building society turned bank, took over HBOS in September 2008.  Like these other banks, through 2008 HBOS itself an amalgam of a bank and building society turned bank, saw rapid falls in its shares.  The government approved of the combination of Lloyds-TSB with HBOS even though it was effectively counter to competition as the 'super-bank' has 38 million customers, compared to a UK population of 61.8 million people.  This buy-out effectively relieved the government of having to take over HBOS itself.  However, the continued difficulty in banks raising funds meant that in 2009 the government bought 43% of the Lloyds Banking Group.  EU rules means that by 2013, it will have divested itself of the TSB brand and hundreds of branches of the retail group.  Now, it seems unlikely that the Conservatives would have overseen the nationalisation of any bank.  They certainly would have backed the buy-out of Lloyds-TSB of HBOS, but then in 2009 what would they have done with this super-bank running into difficulty given that so many people and businesses were dependent on its stability?  The likely solution from their view would have been to sell it to a consortium of equity funds.  Given equity funds' desire for fast profit, it is very likely that we would have seen even faster shedding of staff than the 15,000 made redundant by the company in 2010, a fifth of the total workforce.  By November 2009, RBS has similarly shed over 19,000 jobs.  Again, if the state had not stepped in and the only remaining source of support had been equity funds or perhaps foreign banks, then this figure is likely to have been higher. 

The Bradford & Bingley bank's mortgage book in was bought by the government in December 2008 whilst the savings and bank network was bought by Abbey National, itself owned by Spanish bank, Santander. Without UK state intervention, the only way to have avoid collapse of banks, many far bigger than Northern Rock would have been to hawk them to equity funds or to institutions from other countries.  Spain with its insistence on higher reserves being held by its banks almost inadvertently put its banks in a stronger position to weather the financial crises of 2007-9.

Aside from the state taking over banks, the British government, following the US model, but leading the way in Europe also provided funds that could be used by other banks, 'quantitative easing' to stand in for the lack of available funds on the commercial market. In October 2008 the government made available £500 billion but only RBS and Lloyds-TSB took any of these funds.  Barclays (with £2.3 trillion assets at the end of 2008) refused assistance and turned instead to the Qatari government for funds.  So, even though it would not accepted one government's funds it was happy to take them from another government.  This may have been a model that a Cameron government coming into power in 2007 would have promoted more widely for UK banks in the place of the British government nationalising or providing funds.  HSBC (with £1.736 trillion assets), the other key bank in the UK, was able to weather the financial crisis in the UK through share issues and that unlike the other banks discussed it was a multi-national bank on an already large scale.  A second package of another £50 billion in January 2009 and an increase of state ownership of Lloyds-TSB shares to 65% was announced due to the bank suffering from having taken on HBOS's losses. 

Now, the Conservatives may argue that there was no need to come forward with these funds, especially by 2009 when things seemed to be settling.  To them, no doubt, it all appears far too Keynesian in approach, stimulating the economy through state intervention.  However, much of what happens in the financial world depends on confidence.  A key problem for British banks was not that they had so many bad loans (though some did have a sizeable number) more that international lenders lost confidence in lending to any business engaged in lending mortgages no matter the quality of them.  Thus, the extra funds put forward in the latter stages were important in rebuilding this confidence, not only of lenders, but vitally of savers.  Banks have moved far from when they were dependent on depositors to provide the funds for their businesses, but what is saved cannot be ignored.  In fact, banks that weathered the situation were those who tended to have more deposits and reserves.

In total, the government paid out £131 billion in funds to keep banks from collapsing; including £107 million in fees for financial advice from companies from December 2007 to December 2009.  Other potential expenses such as borrowing support, money put into increase liquidity and protection for savings, brought the total costs to £850 billion, though of course with the easing of the situation not all these funds were called upon.  In addition, through nationalising banks, the government to some extent ensured they would get some of their money back; having them sold to private companies especially foreign ones would have meant that the government's investment to bring stabiliy, and, vitally, to try to increase the amount of lending needed by businesses and house buyers, would have never come back and in fact would have left the UK economy.

To blame the Labour government for the size of the National Debt resulting from the support it gave banks 2007-9 is false.  No government would have been able to allow Northern Rock let alone RBS or HBOS to collapse.  Even the folding of Bradford & Bingley would have had severe consequences beyond just those who saved with or borrowed from that bank.  The Conservatives, many of whom come from banking backgrounds, would not have let their friends go to the wall.  Thus, billions of pounds was needed and this would have gone on the National Debt.  I accept that rather than nationalising, the Conservatives most likely would have encouraged buy-outs by private equity companies and foreign companies.  Whilst this would have saved funds in the short-term, it would have meant that any money paid to banks most likely would never have come back, and, particularly with the private equity companies, the stability would be short lived as the banks would be broken up for what assets they could release.  The UK since the 1950s if not longer has had a real focus on privately-owned housing as a core element of its economic life, much more than any other country.  Instability in the housing market impinges widely in the UK economy and society.  Thus, the closure of banks, the foreclosure of loans, even just a greater restriction on lending than we see now, would all have dented this important sector of the economy, having a knock-on effect on purchasing and in turn jobs and economic activity.  Perhaps the Conservatives could have save a few billions by now bailing out the banks to the extent they were, but the cost would have been more instability and in turn falling tax returns, so reducing any saving they may have made.

The increase in the National Debt was a responsive policy not a proactive one as Fox and other Conservatives pretend.  If they had been in power they would have been compelled to do very much the same.  The alternatives would have only saved some small sums and at a cost to longer-term stability that many would have baulked at.  If seeking blame, one focus has to be on the freedom which financial institutions have had since the years of the Thatcher governments, though, of course, this has been a global trend, especially in the USA from where so often the UK takes its lead.  The Conservative governments of Margaret Thatcher and John Major, in line with other Conservative governments throughout the 20th century but boosted by New Right attitudes that appeared in the 1970s, believed in deregulation and the state standing back in many sectors of the economy, not least in the banking world.  Allowing building societies to become banks was one element in this trend building towards the UK aspect of the crisis of 2007-9.  However, on coming to power in 1997 under Tony Blair, Labour was beholden to the Thatcherite attitude.  Blair was a Thatcherite, making the Bank of England independent was an element of this.  Gordon Brown as Chancellor of the Exchequer was prudent, but in many ways was simply lucky.  No-one during the Blair years tried to rein in the behaviour of the banks and it was only sheer good fortune that meant the crisis did not hit in 1999 or 2003 or some other time in that period. 

Of course, the current government is a clear advocate of deregulation, unsurprisingly as it has been an unchallenged political trend of the last 30 years.  However, it means that the banks remain as free as ever to behave irresponsibily.  It is right that protestors from UK Uncut go into banks and turn them into libraries or woodland.  We could not let the banks collapse, it would have led to a social and economic crisis in the UK unlike anything we had seen.  The taxpayer provided the funds to bail them out after their mistakes, driven by pure greed for massive profits.  We have paid twice because now to fund that the government says it has to be taken out of public services with huge cuts, not by getting the banks to pay back what they received and in this I mean not only funds but also the steps to boost confidence and stop runs.  They do not even have the grace to curtail their vast earnings, they just behave as they did before, uncowed by what happened.  There is nothing to stop a similar crisis manifesting itself this year, next year, sometime soon and then where will be the funds to save the banks this time? It is not a scare story to recognise that in the life of this parliament we could see the end of a banking system that we have become familiar with in the last 40 years and a return to something very dated and very out of step with the rest of the world. 

It seems that, next time, UK banks will, in large part, stop being owned by British companies but by European and probably Chinese institutions.  A number will be asset stripped by equity funds, the only ones who have the money to afford to intervene.  Say goodbye to your savings, say goodbye to getting a mortgage unless you are already wealthy, say goodbye to free banking, say goodbye to even having a bank account if you do not have a well-paid job (especially once the Post Office accounts are privatised).  The current government panders to its banking friends and uses the myth that somehow Brown deliberately wrecked the economy as the excuse for their reverse social engineering and smashing up of the state.  It is a myth.  In the same position they would have done minimally different and like Blair and Brown, have done nothing to stop the chance that it will happen again, this time with no safety net.

When is a State-Run Bank Not State-Run?

I have commented before at how stunning the greed of some many of the leading staff of businesses in Britain are, especially those in a monopoly or cartel position such as utility companies and banks.  The risk of the collapse of banks in 2008 led the British government to take over chunks of a number in the largest round of nationalisation seen since the 1970s.  Not wishing to be tarred with the New Right allegations against public sector business, the government has generally adopted an 'arm's length' model to running them.  The largest bank it now effectively owns is RBS (formerly Royal Bank of Scotland) in which it has a 70% share, so not under total control but quite clearly a dominant majority. In addition, last month it was revealed that towards the end of 2008 the Bank of England made secret loans of £61.6 billion to RBS and HBOS (formerly Halifax Building Society and Bank of Scotland; subsequently merged with Lloyds-TSB).  In total the UK banks benefited to a greater or lesser extent from a £500 billion rescue package.  This was classic Keynesian economics with government deficit financing economic stimulus measures.  It is clear that government action prevented RBS and HBOS collapsing leading to thousands of job losses and severe financial problems in the UK.

Are the current directors of RBS grateful for the fact that the government saved the bank for which they work?  No.  Do they feel even the slightest obligation to temper the greed which got British banks into the dire situation they encountered in 2008? No.  Despite the difficult two years they have been through the directors of RBS have decided to pay themselves £1.5 billion (€1.65 billion/milliard; US$2.49 billion) in bonuses (so on top of their current high pay).  Despite the ongoing difficulties with the recession these bonuses actually exceed those paid last year.  Where is the vast improvement to warrant such payments?  When the government suggested that they do not do this all the directors threatened to resign from their posts.  Lord Mynors the government minister responsible for the banking sector has called their bluff pointing out how many unemployed bankers there are ready to step into the directors' shoes.

It is probably not surprising that others such as Barclays bank and the National Association of Insurers are backing RBS directors in paying large bonuses.  However, as Lord Mynors has pointed out, it is not simply RBS which has benefited from government intervention. Not only did the government take over Northern Rock and the mortgage arm of Bradford and Bingley, it now holds a 40% share in HBOS-Lloyds TSB.  In addition, all banks benefited from 'easing' of the credit availability by the government pumping money into the system.  The government has only been able to fund such intervention which prevented large chunks of the banking sector collapsing, through borrowing.  This borrowing is criticised by the very type of people who benefited from the intervention and risks the UK's credit rating.  If RBS is in a position to pay £1.5 billion in bonuses then it is in a position to pay back many millions of pounds to reduce government debt.

The RBS argument, repeated by their allies in the sector, is that they have to pay such high bonuses in order to attract and retain capable staff.  You can argue that even the bonuses they have paid have failed to do that as clearly as 2008 showed they only had incompetent staff able to wreck the bank they worked for.  Apparently there are at least 5000 bankers in the UK currently earning over £1 million, so what incentive is there to work well if you offer them an additional £100,000 or even £250,000?  As yet, I have to see evidence that we have any skilled or clever bankers in the UK, certainly ones worth the levels that have been allowed to become 'normal'.  These directors can threaten to resign because they can live without pay for many years.  It is particularly bitter when people whine about postal workers who are striking to try to keep their jobs and say that the unemployed are only out of work because they demand too high pay.  There is no 'whip' to bring in line the bankers in the way that they and their kind have been so eager to use on people earning less per year than the cost of one of the bankers' cars; remember 80% of the UK population earns less than £25,000 per year.

I support Lord Mynors.  The directors of RBS can resign if they like.  It will actually do the banking sector a deal of good.  I think then that the government should either dismember RBS or totally nationalise it.  However, importantly, they must run it properly as a state-run bank.  At the moment all the state is doing is pumping cash in and yielding complete control to people who simply want to make themselves even wealthier by funnelling that cash into their own pockets.  That is the morality, the business model of a mafia-run casino, perhaps even an extortion racket, given the level of house reposessions, and bankers who behave this way should not be lauded they should be condemned as we would gangsters.  The government should not be embarrassed at true nationalisation and they should do it on the French model rather than the half-hearted models the UK has had in the past that too often have simply given power to the privileged rather than making the industry benefit the nation as a whole.  They should stop nationalising things on the verge of collapse and take over some businesses in a healthy state again so the UK economy and society can benefit. 

Though the bulk of the population seems to make its assumptions from a Thatcherite economic perspective, with unemployment still high and pay frozen and hours cut back, there is both shock at the arrogance of the RBS bankers (as there was at the MPs fiddling their expenses) and sustained support for action to prevent such flagrant greed continuing unchecked.  In such an atmosphere, the government has the backing to take the necessary action.  It needs to be done before David Cameron and his upper class cronies have any chance to begin again to praise this kind of behaviour in order to benefits their friends in the financial sector.  Gordon Brown, Alastair Darling, Lords Mandelson and Mynors, do not let the RBS directors resign, sack them and block the obscene greed which has done so much damage to the UK!

P.P. 7/12/2009: I was very pleased to hear that Alastair Darling intends to tax the bankers receiving bonuses.  They have been given repeated (too many) chances to moderate their behaviour and yet have not only not done that but have whined on about the government daring even to criticise them.  There was a stage during the MPs' expenses scandal when some MPs realised how genuinely upset the public were about it; the change in expression and response from Margaret Beckett when answering a question about the scandal on 'Question Time' was a physical expression of that shift.  Of course, some MPs still have not really caught on and a couple have been deselected.  However, it was clear that many at the start thought they were doing nothing wrong and even more arrogantly that the public would not take them to task.  Now it is happening, if slowly and incrementally with bankers.  Most of us have no control over what bankers do, it seems even large shareholders (including in some cases the government) have no influence either.  Any, pretty mild criticism of their behaviour has a strong response attacking the critics and telling them to mind their own business.  In many cases now, of course what the banks do is our own business.  I really hope the bankers get hammered for their greed which is sickening when so many people are facing unemployment.  If it compels them to resign, all the better for the UK.  I fear, however, as with the windfall tax on the greedy utility companies promised a couple of years back the bankers will find some way to wriggle out of all of this and thumb their noses at all of us.  Personally I have come now, in the face of sickening greed to favour ending any private banking in the UK and having either mutuals (I bank with the Nationwide, a very successful mutual) or state-owned banks.  Let us get control of the economy back into the hands of the people who it actually effects.  The millionaires are really exempt from economic troughs (though they benefit from the peaks) whereas it is us who lose our job and our house.

Are Britons Only Socialist in Times of Crisis?

Many people argue that the British population is inherently conservative and for most of the time, Conservative, i.e. supporting the policies of the Conservative Party.  I suppose that most people who are generally comfortably off, no matter where they live have a tendency not to want that disrupted and to keep out others from enjoying what they and their families have.  It is a trend even in states such as China, which is Communist and founded on revolution and in which a lot of things still need to change, let alone countries, that whilst suffering from a recession currently, are far better off than those countries where the bulk of the world's population lives.  Recently I have noted people who whilst they want to reduce pressure or upset for themselves actually want other people to suffer more 'for their own good'.  Of course, the standard thing about pressurising unemployed people to take low-paid work and uproot and move right across the country or face punishment have been wheeled out again as the level of unemployment has risen.  However, I have encountered people saying Sweden is now lagging because its policies of equality means there is no 'edge' to drive people to work harder.  These people love having the whip cracked as long as it is on other people not themselves.

You might ask, well, 'what has this to do with Socialism?'  You may ask 'what is Socialism, anyway?'  It is a term that even the Labour Party dropped more than a decade ago.  The wealthy actor, Alan Cummings, when interviewed recently listed it as the extinct thing he would like see revived.  A lot of people equate it with Communism and they think that died the day the Berlin Wall was knocked down in 1989.  Of course, saying all Socialists are Communists is like saying all Conservatives are Fascists: inaccurate and ignorant of how the political spectrum works.  Of course, that was how many people have liked it.  In particular, Margaret Thatcher (British prime minister 1979-90), who, on more than one occasion said she wanted the elimination of a spectrum of political parties and preferred to have simply two very close to each other as is the case in the USA, often equated not only Socialism but the Labour Party (which often had more Liberal than Socialist policies) with the Communist.  In that way she could portray them as a the 'fifth column' or 'the enemy within', in league with the USSR to undermine democracy in the UK during the Cold War.  Of course, Socialists are passionate defenders of democracy as are most Conservatives.

What is Socialism? Well, the key word is 'social', it is a political philosophy which sees the benefit of the whole of society as the key driving force.  Of course, Margaret Thatcher argued that there was 'no such thing as society' and emphasised that it was individuals' desires and units no greater than families who should drive what happened politically and economically.  Socialism argues that people are different, they have different needs and abilities but they should be looked after when they cannot look after themselves (such as when ill, pregnant, unemployed or elderly) but also that they have responsibilities to the rest of the community and that whilst they are free to make their own way in the world and make profits (this is crucially where Socialism differs from Communism) they should not do so by exploiting people whether in their own country or in other countries.  This means employers should pay decent wages, have reasonable working hours and conditions and listen to the people that they are employing.  A key objective of Socialism is that everyone has equal opportunity, whether it is in terms of access to health care or education or to get on in their lives.  Vitally Socialism is against people being barred from certain jobs or other opportunities simply because of what social class they come, what gender, age or ethnicity they are.  In the 1960s this approach, seen with the creation of numerous new universities to allow people greater opportunity to go into higher education, was condemned as 'meritocracy', i.e. that people with ability could succeed.  Of course, this has been turned around from a negative term to a positive one.  As I have noted regularly on this blog since the 1980s we have moved too far away from a meritocracy to too many people simply getting good positions because of what family they were born into or which elite school they attended.  Opportunity is now less than it was thirty years ago.

A lot of Socialist principles overlap with Liberal ones and probably the most Socialist governments in British history, those under Clement Attlee 1945-51 actually pursued a Liberal policy.  Rather than having a controlled economy in line with what Socialism advocates, after 1948 they used Liberal Keynesian approaches, manipulating rather than directing the economy, notably through shifting interest rates.  In terms of health and social welfare, though they created the National Health Service, they permitted private, fee-taking doctors to continue practising and rather than funding a lot of health and social welfare from direct taxation as you would expect a Socialist government to do, they widened welfare insurance, which had been introduced in the 1910s and created National Insurance in line with what the Liberal, William Beveridge had advised during the war.  The idea is that you pay into national insurance as you would any insurance so that you build up a fund that you can draw upon when you need it, for example, when ill or elderly or out of work.  Of course, as with all insurance, some people never make a claim whereas others claim often, but that reflects the diverse needs of our society and that is not something we should try to restrain.

The most Socialist element was nationalisation of key sectors of British industry.  The focus was on the 'commanding heights', i.e. those sectors of the economy that fed through into many others.  Thus, coal mining and the railways were nationalised.  The fact that these industries had been run poorly or inefficiently before was a good reason for the state to take over.  Gas extraction and provision; electricity generation; water supply; coach transport; airlines; freighting and later steel manufacture were all nationalised; though some steps, such as with airlines had been taken before the war.  Other countries, notably France did the same kind of thing.  The British, however, even with nationalisation, tempered Socialism with Liberalism and had a very 'arms length' control by the state of these industries and did not direct them in the ways they should stimulate the economy the way that even right-wing governments in France did especially with the largest state-owned company in France, Electricite de France (now EDF Energy).  Often, as with the example of gas and water supply what we saw in the UK was really just grand 'muncipalisation'.  Many suppliers had been established by city councils in the 19th century and the regionalised approach to gas and water supply (and some water regions, such as City of York, were very small) was continuing this 19th century approach rather than moving to a really Socialist method. 

In later years nationalisation in the UK was not used as a way to try to stimulate the economy but rather to bail out failing companies such as Rolls Royce in 1971 (nationalised by Edward Heath's Conservative Government), British Leyland car manufacturers in 1976 and British Aerospace made up of a number of aeronautical manufacturing companies and British Shipbuilders, the same for that industry, in 1977.  It is unsurprising that nationalised industries that had failed continued to suffer but it meant that nationalisation was now seen as a failed economic policy and this was at the time when New Right ideas were rising both in the USA and the UK emphasising the reduction of all state control or even regulations and clearly nationalised industries were an anathema to such thinking (notably the economic viewpoint held by Margaret Thatcher).  Ironically Thatcher's government nationalised collapsed chemical company, Johnson Matthey in 1984. 

Despite the emphasis on nationalised industries the state sector was never larger than 20% of the economy compared to 90%+ in Communist countries.  In the 1980s and 1990s the nationalised industries were sold off by the government which brought revenue to the state.  The idea was ownership would be held by numerous small shareholders but generally they were bought out by large companies and increasingly ones from abroad.  Whilst there have been regulators of these former nationalised industries control over prices and profits and trying to keep up quality has not really worked; many have a near monopoly and as has been seen in the past couple of years attempts by government to stop them charging high prices and providing poor service have failed.

Conservative propaganda about Socialism has always been pretty successful.  In 1992, Labour did not win the election after a successful campaign arguing that its policies would lead to higher taxation, a view that even Labour supporters seem to come to believe.  In the 1950s the Conservatives argued that Labour's nationalisation was akin to a command economy and though Winston Churchill shot himself in the foot in 1945 likening the Labour approach to the Gestapo by the 1950s the Conservatives were successful in portraying themselves as the party of freedom against Labour's restraint and austerity.  In the late 1940s, of course, the public had been used to both restraint and authority so that argument had little impact.  In addition, Labour does seem to offer solutions to ingrained problems and in 1945 the public had been really voting on the problems of 1931 rather than the post-war era.

The reason why Tony Blair was so focused on manipulating the media was because he knew from history how long it had been manipulated against anything Labour had done.  However, he went so far in making the Labour Party seem acceptable to the media that he sheared it of the bulk of its Socialist principles.  Clause 4, the part of the Labour Party constitution which advocated nationalisation, was scrapped in 1994.  On coming to power in 1997, Labour in fact went further than the Conservative governments by denationalising the Bank of England and so giving up even Keynesian control over interest rates.  I believe that Tony Blair was neither a Socialist or really a Conservative, he was a Blairite and created a personal party out of the shell of the Labour Party; using Christian Democrat principles as the covered, but really based on his own ambitions and simply what he felt was 'right'.  This is why people feel Socialism is dead in Britain, but in effect we probably have not even seen a mildly Socialist government in Britain at least since 1976 if not since 1970 and that is the way company bosses like it.

The key problem for Labour, aside from the fact that the financial sector always tries to make a run on the pound and destabilise the economy, in fear of what constraints they will be put under, is that trade unions see an opportunity to get the deals that they have battled to achieve under a Conservative government.  Now, as in 1978/9, they are busily undermining the Labour government with demands and strikes that make it appear to voters, ironically most of whom will be workers, that the government has no control.  Of course, part of the problem is that no British government has been able to tackle the greed and huge profits of those who run business, so it is unsurprising that workers want more.  If the utility companies had been compelled to pay a windfall tax and bankers to limit their vast bonuses, ironically I think we would be seeing less industrial action.

Anyway, having cantered through Socialism, you might be thinking why is that relevant now?  Well, it is my suggestion that the British population while Conservative most of the time, turns to Socialism when things are going wrong.  In 1945 Socialism was seen as the way to avoid a return to the Depression of the 1930s and the economic slump that had followed the First World War.  In 1964 Socialism was seen as the way to stop Britain's industrial stagnation, unwillingness to modernise and thus its slipping competitiveness from worsening.  In 1974 Socialism was seen as a way to heal the sharp rifts in society and especially in industrial relations.  Of course, there has always been ambivalence as the elections of 1951, 1964 and 1974 showed and the wealthy always pull out the stops to prevent the advent of a truly Socialist government.  This is one reason why Gordon Brown who, unlike Blair, is a Labour leader, has come under sustained media attack throughout his term in office.  However, it is clear that the British public is drifting back in a Socialist direction once more.

Of course, it is not pure, unadulterated Socialism, there are other trends such as blaming problems of immigrants, which are an anathema to Socialism but almost seem to have become a norm in much discussion.  However, adherence to the National Health Service and a national innoculation programme to combat swine flu is one characteristic of a more Socialist outlook. People do not seem to realise that in the USA they would have to have health insurance for things they currently get for free and once they were elderly they would find it difficult to get cover.  Most likely they would be paying for innoculations.   I know prescription charges have risen but no-one pays for innoculation and the elderly and people like me with a lifelong condition, diabetes, who need constant medicines, do no pay.

There are, in fact, demands that the NHS expands it role and does more to provide treatment for the elderly, and for example, one-to-one care for premature babies.  Such things are costly and perhaps people are unwilling to tolerate the tax to pay for these.  The wars in Iraq and Afghanistan, whilst re-inforcing pride in the military among the British population, are seen increasingly as hopeless and people are calling for an exit.  The Conservatives argue that Labour has not provided the military with the equipment it needs, something I agree has been a problem, but how does anyone expect David Cameron with all his emphasis on cutting public spending to be able to afford to send even one more helicopter to Helmand province? 

The key area where we are seeing a return of Socialism is, ironically, in terms of the previously most controversial aspect of the ethos, nationalisation.  We now have a larger nationalised sector in the UK than at any time since about 1986.  The British government took over the Docklands Light Railway in 1997 and effectively the railway track of Britain is run by Network Rail a company without shareholders but underwritten by the government.  In 2008 Northern Rock building society and the mortgage lending part of Bradford & Bingley building society were nationalised. The government took over 60% of the Royal Bank of Scotland and 40% of the HBOS-Lloyds-TSB banking conglomerate giving it a large slice of the British banking sector, especially in mortgage-lending which has always been a key element in shaping the British economy.

It is unlikely that even Clement Attlee would have been able to control such a large aspect of the financial sector.  The closest we came was when Roy Hattersley, deputy leader of the Labour Party said around the time of the 1992 election that the investment group 3i would be nationalised under a Labout Government to form the basis of state investment in private industry.  The uproar was such that the idea seems to have been entirely forgotten almost immediately.  Interestingly, this year, finally, the government is compelling credit card companies to raise the minimum repayment level on the amount people owe.  This should have come in at least 10 or 15 years ago and could have restrained some of the overheated consumption and massive debt that amounted during the late 1990s and early 2000s that has distorted the economy in an unhealthy way.

All of these steps have been taken with no dismay from the general public.  When there is a crisis they expect the government to step in and sort it all out for them.  The rest of the time they whine about over-regulation, the 'nanny state', that taxes are intolerable and so on, not realising that lack of regulation has led to much of the crisis we are now in and that expensive bail-outs can only be funded by taxes.  Again nationalisation, which seems such a dirty word in most years, is seen as the solution.  Again, however, as in the 1970s, it is being used to catch falling businesses.  This is the wrong way to approach the economy.  Northern Rock should have been nationalised before it started its mad approach to mortgage lending.  I would have taken it over in 2005 at the latest and then, rather than it being a drag on the British economy it could have been used to stabilise house prices and provide stimulus to new business. 

With the first £1002 train ticket for the journey from Newquay in Cornwall to Kyle of Lochalsh in western Scotland, a distance of 2,720 Km (a round the world air ticket can be bought for £800 and you can travel from London to Zurich on the luxury Orient Express for £1000 or from Moscow to Beijing on the Trans-Siberian Railway - 5,806 Km for only £995) and most inter-city rail fare prices having trebled in the past 15 years, a period in which inflation has been below 3%, it seems apparent that if we want a mobile population using the greenest form of transport around, i.e. electric trains, then we need the whole rail system back in state control.  You find that the only people who praise the privatisation of the railways are people who never travel on trains.

So, are we seeing a Socialist conscience developing among the British population, wanting a tax on bankers' bonuses, limits on the pay of the wealthy, better value public transport and a health service expanding its scope combined with a tolerance, possibly even an enthusiasm for privatising what are now the controlling sectors of the British economy?  People would argue, as historian Corelli Barnett did in the 1980s that the British have become too used to the 'teat' of state intervention and would be traumatised to have it taken away from them and left to fend for themselves.  However, of course, with Thatcherite policies a great deal has been taken away and yet there are still billions of pounds of benefits that people who are entitled to them do not claim.  Britons are an independent people that still like to make their own way as best they can, despite all the propaganda about benefit swindlers and dole scroungers.  Ironically no-one goes after the tax defrauders who owe millions in total to the British economy but they have taken out to tax havens.  We need to go after these people and make them contribute the way I and the large bulk of ordinary British people do.  We have no choice about paying or not paying tax, so why should the wealthy get to make that choice?  Hopefully people are beginning to realise that only a tiny fraction of the population are ever going to win the lottery or set up a business we can sell for millions or become a pop star or some other kind of celebrity, so instead of thinking it is alright for the rich to get away without pulling their weight because one day we might be one of them, more of us need to make sure there are opportunities for a decent life for all.

The veteran Socialist politician Tony Benn often recounts when he was on a train that broke down and how it suddenly seemed as if people were becoming Socialist, sharing out the food and other supplies they had, working together to make the best of a bad situation.  When the train was running smoothly of course they did none of this.  People often refer back to the 'wartime spirit' when people supposedly collaborated in the way that Benn saw them do on that train.  Historian Nick Tiratsoo has shown that a lot of that was exaggerated and we know that 'outsiders', often Jews, were kept out of air raid shelters and whilst the bulk of the population was struggling to feed their families on rations, those who could afford to, could eat unrationed food in restaurants.  However, though it might have been exaggerated it does seem that, possibly counter to what you might expect, in crises Britons become less rather than more selfish.  It is a shame that they cannot maintain that attitude in the better times.  I know David Cameron thinks he will walk into being the latest Conservative prime minister but the recession has reawakened the dormant Socialist tendencies in the British population and if Labour appeals to those rather than trying to be a pale version of Margaret Thatcher's Conservative party, it may win at the next election.

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.