News from the New Party

No confidence

It may not be Black Wednesday, but Brown Sunday was still the worst day yet for the prime minister.  After months of shilly-shallying, the government's admission of defeat in the search for a private sector solution to the problems of the troubled Northern Rock bank could hardly look worse:  New Labour, after eleven years in office, are in the nationalisation game again.  We are back to the seventies, with a vengeance.

And yet, with circumstances as they are, it is not the nationalisation itself that is the problem as much as the way it has been handled.  Vincent Cable, the Liberal Democrat Shadow Chancellor has been calling for nationalisation more or less from Day One of the crisis.  The question has always been - nationalisation and then what?  Anatole Kaletsky comments:

It was clear from the start that some form of nationalisation would inevitably end the Northern Rock saga. But yesterday's announcement, far from ending this fiasco, threatened to push the Gordon Brown even deeper in the hole he has dug. The purpose of nationalisation should not have been to continue "business as usual", with Northern Rock continuing to lend more money and attract retail deposits, with the backing of Treasury guarantees. The purpose should have been to secure £100 billion of taxpayers' money and to prevent any further damage to the British financial system.

What the Chancellor should have announced are the politically difficult but financially sound decisions he will probably have to concede in the end anyway, under the pressure from the financial markets, from European regulations and from lawsuits by the shareholders of Northern Rock.

He should have announced that Northern Rock would be nationalised not to keep it in business, but to close it down; that the bank would stop lending new money or accepting new deposits as of tomorrow; that all the company's retail deposits would be shifted immediately to the National Savings system, while all the wholesale bonds would be replaced with Government gilts. The company would then be put into run-off, with the Treasury recouping its money gradually as existing borrowers repaid their mortgages over the years.

Nationalisation, in other words, made sense only as a necessary legal stepping-stone to the orderly liquidation that Northern Rock required as soon as it ran out of money in September.

The government's vision of "business as usual" for Northern Rock - essentially adds up to propping up an unprofitable business with taxpayers' money for the sake of appearances while running the operation as a kind of government employment agency.  In other words, it is the sort of seventies-style socialism we all thought had been left behind forever.

Kaletsky continues:

Nobody in Parliament has yet drawn the obvious comparisons between the largesse being directed at Northern Rock and the tough love practised on far more important and famous British companies such as Rover, Leyland and GEC-Marconi. But this silence merely testifies to the political bafflement and financial confusion created by the disaster. Now that the financial uncertainties about who will own and control the company have been resolved, the question is why it should continue to stay in business with public support.

Why should a Government that has consistently refused to offer public funding for potentially viable commercial projects of real national importance - aerospace, public transport, nuclear power - now be spending tens of billions on supporting a bust mortgage bank? Is it because Britain is short of mortgage lenders, lacks employment opportunities for bankers or suffers a deficiency of financial innovation?

Obviously not - but equally in future any financial institution which finds itself in dire straits can be expected to demand similar support to that which the government has bestowed upon Northern Rock.  The ramifications of this decision are enormous - can we be sure that the government is prepared for them?   The signs are not good - the Chancellor of the Exchequer has been described by the Opposition as a "dead man walking", while some Brownites are briefing against Alastair Darling with a view to replacing him with (God help us) Mr Ed Balls.  For all the bluster about the government's long term planning, the current administration is so shell-shocked it can barely plan beyond the next news bulletin.  Iain Dale has suggested that it is time for David Cameron to table a confidence motion in the House of Commons.  Though the motion would surely fail, there seems little reason why he should not.  It is hard to think what else the government might do to forfeit the confidence of the nation.