Sunday, February 17, 2008

Northern Rock - A Failure of Government or a Failure of Business?

To hear some Commentators and certainly the Conservative Opposition here in the UK, you would think that the Failure of Northern Rock was a Failure of Government.

Gordon Brown is accused of 'returning to the Nationalisation of the 70's'.

It seems to me that you could just as easily view it as a 'Failure of the Capitalism of the 80's'.

After all, it was Northern Rock - a Private Company - which Failed. It could not Maintain its Liquidity and threatened to go 'Bust'. The fact that it has plenty of Assets is beside the point. Many a Business goes under due to a Lack of 'Cash Flow' regardless of a Healthy Asset Base.

An out and out 'Thatcherite' would probably argue that the Bank should have been left to do just that - Go Bust. This is a more consistent position than the one being adopted by the Conservative Opposition. They supported the 'Bail Out' using Tax Payers Money. That is not consistent with a view that the Market should prevail and take its natural course.

The Shareholders risked their money and so did the Savers. If they turn out to be wrong about the Return on their Investment, why should they be protected? Nobody forced them to invest their money in Northern Rock. This would be the consistent 'Capitalist' position.

Most people would agree that had Northern Rock been allowed to fail the consequences could have been dire for the rest of the UK Banking System. The Social Consequences and the 'Knock On' effect on the rest of the Economy could have brought about a Severe Recession or even a Slump. This is why the Conservative Opposition supported the 'Left Wing' position that Tax Payers Money should be used to Underpin the Survival of the Bank.

The 'House of cards' which is our present Debt Ridden Economy might collapse. Too many people have used Cheap Credit to Buy Properties which they cannot afford. This has Inflated the Price of Property and these Inflated Property Prices have been treated as an Asset instead of a Liability. People have used the Nominal Asset Value of their Mortgaged Property to Borrow even More Money.

Banks have taken the same Cavalier Attitude towards Debt. Instead of properly Assessing Credit Risk and Taking Responsibility for the Risks Taken, they have sought to Displace the Risk. They want the Return without the Risk. They therefore attempt to Sell the Risk on or create some 'exotic' Derivative in the attempt to Displace the Risk onto a 'Speculator'. These Derivatives have ended up Creating an Illiquid Market of Risk. The Final Consequences of this Process are still Not Clear.

Sooner or later the 'Chickens' were bound to come Home to Roost and they have. The 'Credit Squeeze' and the accompanying Downturn in Property Prices was an entirely Predictable turn of Events. The only thing which could not be predicted was when it would happen. We still cannot be sure how long this has to run and how far it may go. Only the 'Market' knows and it is not telling!

Yet this is all now being portrayed as a 'Failure' of the Present Government.

In my view any Failure of Government rests with Previous Governments. They deliberately Engineered a Credit Boom in order to Rejuvenate a Flagging Economy. They therefore created a 'Demand Led' Economy rather than a 'Supply Side' Economy. These Governments were mainly Conservative although the practice was then inherited and continued by 'New Labour'.

In fact the 'Western' Economy as a whole is far too much 'Demand Led' in my view. The 'Supply Side' has shifted mainly to China with the United States doing most of the Consuming. This has created a Massive Imbalance which threatens to Destabilise the Whole System. Some people talk about 'Decoupling' by which they mean that China, India and others might develop enough of an Alternative Export Market to mitigate the effects of this imbalance. We can only hope that this takes place.

If it does not, the Present Imbalance will 'Correct' itself sooner or later. The Social Consequences of this 'Correction' could be very severe indeed.
Government Intervention would be demanded by the Electorate. Will this then be regarded as a Failure of Government or a Failure of Capitalism?

I have always believed that Market Capitalism is the most effective way to run an Economy but only if it operates within 'Boundary Conditions'. These 'Boundary Conditions' are set by Society. This is why Capitalism only works for the Public Good within a Democratic Framework. Markets must always be regarded as a Means to an End, not an End in Themselves. Only People are an End in Themselves.

Markets, like the Climate, are subject to Periodic Bouts of Erratic Behaviour. In between times all is well and nobody notices their operation. In times of Turbulence and Irrationality it is entirely right that the Government should Intervene. It is Disingenuous to Portray this as a 'Failure'.

I am not a Socialist because I believe that Socialism is the Cure which ends up being worse than the Disease. I do not believe that an Economy can be directed by a collection of 'Peoples Committees'.

Equally, I am not a believer in Pure Market Capitalism either. Sometimes Markets Fail to Serve the Common Good and when this happens the Government has a duty to act on the Behalf of the People who Elected it. If this later turns out to be a Mistake then the Government can be Unelected at a Later Date.

This is why Democracy is Essential. Without it, either the Government or the 'Market' is Always Right. In practice both Governments and Markets make mistakes. Democracy is our only Means of ultimately Correcting these Mistakes.

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