News from British and Canadian Conservatives

Saturday, September 22, 2007

Did the wise man built his house upon the Rock?

The headlines have been dominated by the perilous position of the Northern Rock bank over the past fortnight. In the wake of the credit crunch caused by the Sub-Prime Mortgage scandal in the US, they were finding it increasingly difficult to sustain their business model.

There has been much debate over the past few days, since the Treasury stepped in to guarantee all savings held with the bank and the Governor of the Bank of England has come in for criticism in sections of the press which are willing to submit to the "official" Brown line. I have to say that I can't see ths situation in the same way.

Firstly, it seems to me that the Governor of the Bank, Mervyn King, is entirely right in his assessment of the situation. You can't have the government propping up a bank in a competitive market. It sends out entirely the wrong signals to the others. It encourages risky investments, which are not a sustainable foundation upon which a successful economy can be built. Ultimately, if enough people decide to take the risk, the burden on the taxpayer will be huge. In a private business, such massive liabilities would be clear to all, as they would have to appear in the balance sheet. Past experience demonstrates that the government's books are not so clear. The massive liabilities which already face the government, through off balance sheet Public-Private Partnerships, the off balance sheet Network Rail financial guarantees and the massive off balance sheet public sector pensions liabilities. Combined, these already add up to approaching £200,000,000,000. The new guarantee of all savings up to £100,000 will push that liability up by a figure I could only guess at. It has been widely reported that Northern Rock holds private savings valued at approximately £24,000,000,000 but they are only a small player. The Big Five (Lloyds TSB, Barclays, HSBC, Royal Bank of Scotland/Natwest and Halifax-Bank of Scotland) and the other smaller institutions will push that up to an astronomical level, probably several times the existing unstated Government liabilities.

Of course, it's not really the Government that is liable - it's you and me, the tax payer.

So how did we get into this sorry state? There are two lines coming from the Government, seeking to push the blame on to everyone but themselves. The first is that the situation started in the US, is totally out of their control and could not have been forseen. Except, it was forseen, by very many. Economic analysts have warned of the dangers of our debt-driven economic growth for years. I myself expressed concern as a mere A Level economics student. The Conservatives have raised the point on numerous occasions, both in Parliament anf on the campaign trail. And perhaps most significantly of all, Eddie George, the previous Governor of the Bank of England, warned on the unsustainable position years ago. Reputedly he threatened to resign over the issue, but ultimately he went at the end of his contract.

The second line of attack which I have seen in the left-leaning sections of the blogsphere blames Margaret Thatcher. What haven't they blamed her for, even 17 years on?! Again, this is nonsense. The Thatcherite reforms to our financial systems in the 1980s were perfectly sensible. They ended the out dated nanny-statery that did all the thinking for us. It stopped telling us how much we could borrow as a nation and how much we could spend abroad, allowing us to make decisions for ourselves. It is quite clear that Gordon Brown, as the Chancellor of the Exchequer and then Prime Minister for more than a decade, has been in a position to undo anything he considered to be wrong with that. Instead, he has chosen to encourage wreckless borrowing. The introduction of new, easier bankruptcy proceedings means that you can now leave bankruptcy within just a few months, and you can often avoid it altogether through CVAs and such like. That removed the stigma from wrecklessness upon which the system relied, and now we're reaping what Brown has sowed. For now, Brown has averted the inevitable disaster and financial meltdown through an uncosted and unsustainable guarantee. He has simply delayed the inevitable and ensured that when we fall, the fall will be even more catastrophic.

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