Accurate economic forecasting is almost impossible. JK Galbraith argued that its only purpose was to make astrology look respectable by comparison, while even Alan Greenspan, chair of the Federal Reserve for 19 years, had such little confidence in its use that he preferred to use the Fed’s resources to restore confidence after a market crash than change interest rates based on predictions of future problems. In this light it is perhaps excusable that politicians failed to pre-empt the run on Northern Rock last year and underestimated the impact of the credit crunch on sub-prime mortgages. The question now is what should be done with the bank, and it seems temporary nationalisation is the answer.The danger of a run on a bank cannot be overstated. In 1929, runs on major banks led to the collapse of the financial system, which in turn led to the most severe recession in America’s history. Clearly the threat in the UK was on a smaller scale, but if the government had not immediately guaranteed the deposits, then the bank may well have collapsed, destroying saver confidence and possibly leading to similar troubles in other high street banks.Nationalisation now will send out the message that the government will not let banks fall or deposits be lost, and such a policy will should prevent runs on banks in the future. This process will undoubtedly cost the taxpayer money in the short term, but if nationalisation is necessary to save our financial system from meltdown and will look after our economic interests, then it is worth the cost.Nationalisation is also the best way to recover as much public funding as possible. Will Hutton, in a detailed analysis, showed that the private sector bids led by a Virgin consortium and the Northern Rock management were totally inadequate in this respect. Both demanded further government subsidy and neither was willing to pay enough money to claw back the funds used to save Northern Rock initially.
Both Labour and the Liberal Democrats seem to be in agreement with the solution that Hutton offers: that the bank should be kept in the public sector until the housing market improves and Northern Rock’s value recovers, so that when it is finally returned to the private sector it may be sold for a higher price than recent offers. Furthermore, there is no question that depositors’ money will be better secured by the move into public ownership, given the government’s promises to that effect and the state’s vast resources. This will be crucial for the restoration of saver-confidence.There are objections to nationalisation. Trade unions fear job losses and shareholders will not be able to make any short term gains. There are fears about the government’s lack of expertise in running a bank. However if job cuts are necessary to improve Northern Rock’s inefficient business model then so be it. Equally, if the government step in to save a company on the brink of collapse (which would have seen an absolute loss in the value of shares), then the shareholders cannot be too angry at the way it has chosen to help their company recover. It was, after all, the fault of shareholders for investing in a badly run company. Finally, the problem of expertise has been overcome by the recruitment of individuals such as Ron Sandler, former head of Lloyds in London, to help run the bank.Nationalisation will quell public fears about the safety of their money and insulate other banks from the threats posed to Northern Rock last year. It also represents the best way to regain taxpayers’ money and secure current deposits. This is clearly the most sound policy, and the ideological objections of the Conservative front bench honestly do not merit consideration.
Alexander Waksman is Treasurer-Elect of OULC.
Nationalisation is the best solution
