14 September 2007

Northern Rock on a roll... downwards

Big financial story of the day is that Northern Rock has asked the Bank of England for an emergency loan - which is a pretty unusual event. When this happens it's normally a sign that a bank is close to going bust.

If I had had my eye on the ball over the summer I would have been covering the current financial crisis a lot more closely than I have done. The 'sub-prime' mortgage defaults and consequent rise in the price of credit have left a lot of financial institutions - across the world - with big holes in their balance sheets. On its own I don't think this crisis is big enough to collapse the system completely - the bad debts are large but they're not THAT large - but it will give rise to a very different feel in the financial markets. The days when economic "growth" could be generated merely by massively expanding the indebtedness of a company, through the expansion of private equity (or indeed the consumer sector, through a housing bubble) seem to be coming to an end, at least for now. Of course, capitalism as we know it relies on credit markets to drive growth; but what we've seen over the past five years or so is an unsustainable expansion of credit, driven by a combination of lax regulation and that combination of greed and desperation which is at the heart of the capitalist mindset. Chickens are now coming home to roost.

My hunch (and that's all it is as the real data are buried somewhere in company balance sheets - after all I had no idea Northern Rock was in trouble until today) is that the US and Europe are going to go into recession on the back of this - probably next year. Maybe now's a good time for Gordon to have a general election (although it's certainly possible to win an election in a recession - just ask John Major) as I don't think the economic data will look anywhere near as good six months from now.

Advice for savers with Northern Rock: don't worry. The govt won't let a major financial institution collapse and will just surreptitiously bail out the companies involved unless they're particularly small and reckless (Barings springs to mind). These guys have all read about what happened in the 1930s. Mervyn King's assurances that the Bank will not bail out dodgy investors are bullshit - almost like a UK version of Greenspan, how does this guy get such kudos whilst delivering about as much economic insight as Tommy Cooper? King knows that propensity to do dodgy deals is the only thing which drives the UK economy forward these days, reliant as it is on the financial sector. The more recklessness there is out there, the better UK plc does - until there's a crisis like this. Then the backhander comes into play, bailing out the big financial institutions - the ones you'd notice if they went bust. Who pays for this? Smaller borrowers (through higher interest rates.) i.e. anyone with a variable rate mortgage. Or small businesses with bank loans. Or people with bank loans... the little guy just got screwed once again. Welcome to what our American friends would call "Real World Economics 101". I like the sound of that.

I'm thinking very seriously about desigining and delivering a course in radical economics for the Workers Educational Association - a useful project for next year. I'll let you know.


Van Patten said...

Given your obvious affinity for the politics of the country and your lauding of clowns like Livingstone and Galloway, do you know of the impact of the Crisis on North Korea?

giroscoper said...

Actually, although the North Korean economy has many problems, susceptibility to global financial crises isn't one of them as there is no private banking sector to speak of.