Tuesday, February 19, 2008
NORTHERN ROCK
We have, by degrees managed to arrive at the worst possible (unless somebody knows better) solution to Northern Rock. We are liable for the lot & it is run by politicians.
My position has been that bankruptcy is a well tried method. What happens is that the shareholders lose their investment & the administrater runs the company until he can sell it off, possibly bit by bit & meanwhile it keeps trading if it is, as we have been repeatedly asurred it is, trading profitably. Bankruptcy may be the most important part of the capitalist system. It gives a limit to exactly how badly things can go. In governemnt if a project doesn't succeed it is more likely than not to get a biger budget to try again. Businesses can't do that. Thus to decide that NR will be protected by an essentially unlimited government purse takes away the system's ultimate strength. We could & should have put in a receiver.
Beyond that does anybody think the government is going to run it better than Branson?
I put this on John Redwood's blog:
Assuming that they do not run it as successfully as Branson would have this could be the “Spanish ulcer” that has already destroyed Brown’s reputation for prudence & goes on to bringing Labour crashing in the election. It should also be remembered that this is the policy of the LibDems.
Since you are, correctly, crowing about having been right continuously when the government have been wrong at every turn here, may I also remind that I suggested that the government should have called in the receivers. Even if the receiver had been unable to sell it off, in whole or part, the worst possible result of bankruptcy would have been better than this because the taxpayer would not have been out (£400 million?, £800M?) to the shareholders & politics would not become part of the day to day management of the thing. I have just heard Darling on a BBC radio interview in which the interviewer asked all sorts of stupid questions such as “would the government be happy foreclosing on NR mortgagees”. Much more of this to come.
Other problems:
Having established that the government will do anything to protect NR they are essentially stuck with the same implicit guarantee to all banks - some of which are much larger. Knowing they have a safety net will make banks a bit more reckless than they should be.
What effect will this have in Scotland. My Yellow pages shows 3 offices in all of central Scotland - 2 in Glasgow, 1 in Edinburgh yet this will be funded out of central government money & even worse - so is the £110 billion (up from £100 a couple of weeks ago) liability. Our budget, under the Barnet Formula will be cut for a rescue which barely touches us. Scotland's liability is pro-rata about £9 billion.
From my point of view the worst thing will be the efect it has on housebuilding. I have long said that the way to stop the housing crisis is to let people build houses. This would lead to a fall in house prices. We normally regard price cuts as a good thing but on housing have got stuck into the view that houses are investments, which go up faster than other investments, & only secondarily for living in. Well they aren't. Rising house prices are a function of scarcity which is caused by government regulation. I don't believe that banks have not been perfectly well aware that people needed to go in hock to them for these sums purely because of government creating scarcity & that housing could be far cheaper if allowed. Thus I have no sympathy if falling prices mean the properties on which they have advanced money was worth far less. Tough. They went into it knowing this far better than the purchasers did.
However we may now see government desperate to prevent a house price fall because they now appear committed to take on the liabilities of any failing bank. This could mean that the one big new idea Gordon Brown has endorsed - that housing shortage can be solved by building houses (a brilliant flash of inspiration, at least by UK political standards) may be dumped because keeping house prices up becomes the government's priority.
If the Tories want to do some good here rather than just enjoying Labour's discomfort (& that of the LibDems who have been actively enthusiastic about nationalsiation) they should press for some statement that the governemnt will not repeat this rescue with other banks. This is unfair but it follows the old advice for somebody in a hole - stop digging.
My position has been that bankruptcy is a well tried method. What happens is that the shareholders lose their investment & the administrater runs the company until he can sell it off, possibly bit by bit & meanwhile it keeps trading if it is, as we have been repeatedly asurred it is, trading profitably. Bankruptcy may be the most important part of the capitalist system. It gives a limit to exactly how badly things can go. In governemnt if a project doesn't succeed it is more likely than not to get a biger budget to try again. Businesses can't do that. Thus to decide that NR will be protected by an essentially unlimited government purse takes away the system's ultimate strength. We could & should have put in a receiver.
Beyond that does anybody think the government is going to run it better than Branson?
I put this on John Redwood's blog:
Assuming that they do not run it as successfully as Branson would have this could be the “Spanish ulcer” that has already destroyed Brown’s reputation for prudence & goes on to bringing Labour crashing in the election. It should also be remembered that this is the policy of the LibDems.
Since you are, correctly, crowing about having been right continuously when the government have been wrong at every turn here, may I also remind that I suggested that the government should have called in the receivers. Even if the receiver had been unable to sell it off, in whole or part, the worst possible result of bankruptcy would have been better than this because the taxpayer would not have been out (£400 million?, £800M?) to the shareholders & politics would not become part of the day to day management of the thing. I have just heard Darling on a BBC radio interview in which the interviewer asked all sorts of stupid questions such as “would the government be happy foreclosing on NR mortgagees”. Much more of this to come.
Other problems:
Having established that the government will do anything to protect NR they are essentially stuck with the same implicit guarantee to all banks - some of which are much larger. Knowing they have a safety net will make banks a bit more reckless than they should be.
What effect will this have in Scotland. My Yellow pages shows 3 offices in all of central Scotland - 2 in Glasgow, 1 in Edinburgh yet this will be funded out of central government money & even worse - so is the £110 billion (up from £100 a couple of weeks ago) liability. Our budget, under the Barnet Formula will be cut for a rescue which barely touches us. Scotland's liability is pro-rata about £9 billion.
From my point of view the worst thing will be the efect it has on housebuilding. I have long said that the way to stop the housing crisis is to let people build houses. This would lead to a fall in house prices. We normally regard price cuts as a good thing but on housing have got stuck into the view that houses are investments, which go up faster than other investments, & only secondarily for living in. Well they aren't. Rising house prices are a function of scarcity which is caused by government regulation. I don't believe that banks have not been perfectly well aware that people needed to go in hock to them for these sums purely because of government creating scarcity & that housing could be far cheaper if allowed. Thus I have no sympathy if falling prices mean the properties on which they have advanced money was worth far less. Tough. They went into it knowing this far better than the purchasers did.
However we may now see government desperate to prevent a house price fall because they now appear committed to take on the liabilities of any failing bank. This could mean that the one big new idea Gordon Brown has endorsed - that housing shortage can be solved by building houses (a brilliant flash of inspiration, at least by UK political standards) may be dumped because keeping house prices up becomes the government's priority.
If the Tories want to do some good here rather than just enjoying Labour's discomfort (& that of the LibDems who have been actively enthusiastic about nationalsiation) they should press for some statement that the governemnt will not repeat this rescue with other banks. This is unfair but it follows the old advice for somebody in a hole - stop digging.
