17 November 2007

Rock and Roll Suicide

The immediate crisis at Northern Rock has passed, but only because the government has spent an estimated £40bn. of our money preventing the bank from collapse. This was a desperate strategy, only resorted to because of fears that the collapse of Northern Rock might lead to the failure of other banks and eventually the collapse of the whole banking system.

This is a huge public investment, of the same order of magnitude of the whole of health spending in one year, which is somewhere above £50bn. these days. It raises several questions about the meaning of a democratic society. Perhaps the most important is why a reckless financial institution, that produces nothing of value, can be bailed out in this way, while countless manufacturing companies which produce useful goods and employ many more people have been allowed to fold to conform to the iron law of the market. Clearly, the interests of capital carry more weight than the interests of labour.

The most important questions to be decided now are who should bear the loss of the bad investment decisions taken by the bank's board, and who should see the value of the assets it still holds. Should the British public really be asked to compensate shareholders who made poor judgements? They see the gains when their tricks pay off; what sense can there be in calling this a financial market if they do not also see the losses?

In terms of the assets the vultures are circling hoping to prey on the carrion at the expense of the British public. An offer to pay £1 for the bank is not a generous bid but rather a grab for the significant assets still owned by Northern Rock. Of the 'bidders', Branson and Flowers have both been the beneficiaries of government largesse in the past and scent the opportunity to make a killing. The fee for saving the government's political bacon can be a generous one, giving new meaning to the phrase 'laughing all the way to the bank'.

A financial institution that was once a staid and responsible building society, operating for the mutual benefit of its mortgage-holders and depositors was transformed by demutualisation into a victim of destructive financial speculation, mediated by greedy shareholders who believed in returns to-good-to-be-true and the wideboys to whom they relinquished control of financial destiny.

As an alternative to a state-sponsored corporate buy-out, nationalisation of the bank has been mooted. But rather than a nationalisation resulting in state ownership surely a remutualisation is a better solution. Shareholders, whether instutitonal or personal, can lose their stake as a lesson to themselves and others about rapacious expectations and dodgey dealing. The government can limit public investment to ensuring the value of depositors investments, while the remaining assets of the bank will be the homes of its mortgage-holders.

Governance can revert to an board elected from among the lenders and borrowers of the building society, as was traditionally the case. Calls for independent financial experts to play a major role have surely been utterly undermined by the disgraceful performance their have displayed thus far in this and other banks the world over.


  1. To be fair I think you'll find it's only about 38% of health spending which is this year set to top £110bn I think.

    What it is though, and probably a better comparison, is about 75% of all the notes and coin in circulation. It would be an interesting exercise to have a look at the Bank of England balance sheet to see where it all came from. They must have either created it or borrowed it.

  2. Hi Jock

    I knew somebody would query that figure (!). It is based on the figure of £52bn. that I found in government accounts a couple of years ago for health spending. I know spending has gone up since then but it's hard to believe it's doubled. Can you tell me where you find your figure? I don't understand why government accounts are so hard to read and it makes me suspicious. My figure does not include capital investment or off-balance-sheet accounting via PFIs. Perhaps your does?

    On the Bank of England, there workings seem even more opaque. I have an excellent 2pp. A4 article from Connall Boyle working out the value that accrues to the bank from seignorage if that is of interest.

  3. You're right there is something a little awry with my numbers. I use something called the Public Finance Databank which you can find here. My set from 2005-6 says that health that year was projected to be £96bn and I am sure I read somewhere that this year, which is the last of the previous CSR period, was going to be £110bn but I see from the current year's Public Sector Finance Databank (excel file) it is still showing as £96 bn - maybe so many have died from MRSA that they hae saved £15bn or something! More likely it's been money announced more than once by Gordo in his enthusiasm for showing how much more he's been spending!

    I'd be interested to see Conal Boyle's article - do you know of "Creating New Money" by James Roberston for the NEF a few years ago which explains seignorage quite well (but over a hundred pages). My impression is that the BofE actually makes very little in seignorage because it never actually creates the money it would be entitled to do - that the commercial banks effectively gain that seignorage by creating new debt. Which is why it would be interesting to see how the Northern Rock lending has been funded - whether by the BofE borrowing or by actually creating that new credit and gaining some seignorage at last.

  4. Can the Bank of England create non-cash money out of thin air just like commercial banks can?

    If so, then why didn't it do so to bail out Northern Rock?

    If it did, why does the media and politicians keep talking about the taxpayers having to lose out?

  5. In response to Bill, Jock rightly questions whether the money that was used to bail out Northern Rock came from direct creation, i.e. without cost to the taxpayer and with seignorage value going to BoE. Or whether it was created by selling government bonds. The Bank is so secretive I don't know whether we will find out about this for some while.

  6. Keep up the good work.

  7. PS I've reported it and a few others.


    No need to publish my two comments, just delete the spam.