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A Year Is A Long Time In Politics

September 18, 2008

A Year Is A Long Time In Politics

A year ago this September there was much speculation that the Prime Minister was about to call a General Election.

Whatever were his private reasons for not doing so I was convinced that he would avoid the opportunity because of the crisis which was arising at Northern Rock. The phenomenon of the Northern Rock ‘run on the bank’ which developed during September and October 2007 signalled the start of what has become known as the credit crunch.

Yet my contacts in the City and in the US had been telling me early that summer that a banking crisis was imminent because of the failure of the housing market in the US. This country’s financial health is tied to the US so it did not need too much thought to recognise that there were difficulties ahead for our nation’s financial health. It was at that point that the government and the Treasury needed to take some tough decisions to ease our future. This opportunity was flunked.

A year ago many so-called experts advising the government were left floundering as to what the financial future held. However there were many of us who claimed by contrast that urgent decisions were needed to keep this country from recession. What followed was not just a period of hesitancy but downright indecision. The fiasco of Northern Rock with its sorry catalogue of poor judgement and woeful vacillation has become a deepening story of public money being used to resolve failures of this Government and the people it entrusts with its financial decision-making. And unfortunately it will continue.

I have made it clear in previous published articles, over the last year, that the major responsibility for what happened at Northern Rock was a failure of the senior management of the Bank and the array of non-executive directors who should have realised that the aggressive growth in turnover strategy depended upon continued economic blue skies and liquidity in the money markets.

Once the downturn in the economic cycle happened, as it always will in capitalism, Northern Rock as with many other institutions, found itself exposed in a way that it was unable to recover. The same has been found in the US mortgage institutions, known colloquially as Fannie Mae and Freddie Mac, which have now been “nationalised” by the US government.

But the problems of the US institutions should not be compared with Northern Rock whose primary job was as a bank. The two US institutions were mortgage guarantee organisations backed by the US government so it was only the US government itself which could “save” them. In Northern Rock’s case, as a private bank, it could have been sold to another institution. But the Bank of England acted with caution when Lloyds TSB put a takeover proposal on the table in August last year. Now in September 2008 Lloyds TSB have been actively encouraged to “save” HBOS.

This country’s financial health is now in the hands of a Chancellor who believes this is the worst economic crisis for 60 years (even the government’s critics would not claim this) and a slow-moving Governor of the Bank of England, who still worries about inflation as we sink further in the mire. The global financial crisis will lead to major changes in the banking world but the size of the problem means that a year on from last September Northern Rock is hardly given a thought. Its decline however continues and I believe it will prove very poor value for money for the taxpayer in the years ahead.

The true endgame for Northern Rock, not to mention the accumulated costs to the hapless UK taxpayer, will only be apparent half a decade or more in the future. It may have been politically expedient for the government at the time but I fear the future will show that the decisions made in 2007 made little economic sense.