The Northern Rock, The Bank of England, the limitations of Market and the opportunities for the left…

A telling article in the Guardian on Wednesday by Nils Pratley considered the fall out from the Northern Rock affair. I have to be honest, I felt for the last number of days that the long lines of people queuing to retrieve their savings were generated by considerable media hype and misreporting. I certainly don’t blame the individual in the face of that media onslaught deciding that a financial catastrophe was unfolding and that they were more than bit players in it, but the reality, as ever, appeared significantly different.

No doubt some will see this as evidence that the financial system is unstable and doomed to failure, and perhaps it is although considering the remarkable adaptability of capilitalism I tend to doubt it. But putting that to one side there are a number of fascinating elements to the story. Firstly is the clear public wish expressed by those who had placed their savings in Northern Rock that the government should underwrite their money. Not the Financial Services Authority who has taken the lightest of light touches in the recent past, and which in any event has no power to underwrite anything. Not the Bank of England which since the early days of the first New Labour administration has been given independence (although the nature of that independence is now under some discussion). No, the customers of Northern Rock, and a broader constituency which includes pretty much everyone who puts their savings in commercial financial institutions, demanded that the government must come to the rescue. Now why would that be?

Well this requote of Nick Cohen from the good old days might supply the answer…

“…however novel the ability of companies to shift money and jobs around the world, and however restrictive the limits on the autonomy of national governments have become, corporations remain weak. When all is said and done, they are hierarchical associations for the production of profit. They can’t raise armies or levy taxes or enact legislation. Governments can do all three and turn nasty if they have the inclination…”

Because it is government and state which remains the single unit in local and global economic processes with the authority and resources to deal with these situations.

Which, after some agonising, the British government eventually did. In a way I don’t blame it for the agonising. This, after all, is not the way the script is meant to be written in the contemporary period. We’re far from the laissez-faire approach to state intervention of the 19th and early 20th centuries, but there is a mindset that has evolved whereby the state is little more than a facilitator, not an actual player, in terms of commerce. What has effectively happened is that a company went through a difficult financial period, saw its customer base beginning to flee, this dynamic held within itself the potential for panic across the financial services sector in the UK (and perhaps further afield). The government reluctantly stepped in to assist the company and its shareholders (although note that the actual customers, whose money was the bedrock of the bank, were disregarded in this little dance until they started to vote with their feet). Would this largesse on the part of the state happen in any other sector? Most unlikely.

And as Pratley notes:

That looks like a straightforward bail-out for Northern Rock’s shareholders, exactly the outcome the Bank of England has warned would store up trouble for the future.

Why trouble? Because:

The Bank is right, of course. If all deposits at all banks were to be guaranteed – which seems to be the implication of the chancellor’s statement – the state is potentially accepting an enormous liability. Worse, an odd incentive is created: managements who are insulated from a run on their bank might be inclined to take wilder risks with the cash.

Of course there are differences to other economic enterprises that no doubt apologists will reiterate. Northern Rock remains a viable concern, although the likelihood is that it will be subsumed into some rival in the near future. The government isn’t in the process of throwing good after bad, at least at this point in time.

But Pratley points to a bigger issue. In the US depositors are guaranteed savings up to $100,000 in the event of a bank going bust. As he says: The US-style system seems infinitely fairer on customers, who can’t reasonably be expected to assess the merits of various banks’ business models before deciding where to place their savings.

Indeed. The perfectibility of markets seems yet again to be held hostage to the imperfection of the human agents who interact with them. The problem is again, that such largesse creates its own problems, as with his point about banks taking ‘wilder risks with the cash’. The answer?

How about a higher rate of tax on banks’ profits, or some other form of annual charge based on a bank’s capital ratios? Banking bosses and their investors would scream at the idea, but it’s perfectly logical.

And the rationale for such a disgraceful intervention? Well, it’s remarkably sensible in purely commercial terms…

If deposits, up to a certain sum, are to be guaranteed by the state, then the state needs to be compensated for taking on that risk.

Because, after all, as has been pointed out on numerous occasions by the prevailing economic narrative, the state is using our money. But what is interesting is that that idea of intervening in this particular area even in the lightest way, which arguably belongs to a counter-narrative, reformist and minimalist as it is, hasn’t been promoted in the past by the left [incidentally, not to be too negative, but the actual level of real as distinct from perceived economic knowledge on the left is remarkably thin despite the great founding works being explicitly rooted in economics… that too is a problem]. Yet such an idea belongs in a broader approach by the left which is willing to exercise power and not simply accept that the market – useful as it is on so many different levels – is beyond reach or logic.

As we’ve seen, when it comes to the crunch it is the state which is seen, at least in European societies (but not just there, note the way the US is ahead of the curve on this issue at least and provides at least the outlines of a model for investor and customer security), as the guarantor of social and economic stability. I’m wary of a simple-minded or reductionary statism – say the nationalisation of all financial institutions – but as with this there are mechanisms available, through taxation, through subsidiary regulatory bodies and through – perhaps – at the end of the day a willingness to seriously engage on this terrain and provide those counter-narratives (consider the ironic popularity now of state backed savings plans which have just received a shot in the arm in the UK due to the Northern Rock debacle) which are necessary if a left project is to commence and to sustain itself. The thing though is, if left reformism doesn’t actually make a stand on such issues is it any wonder that left projects become discredited, and not merely to those further left….