Northern Rock Bail-Out Totally Wrong Completely Right

Yesterday, Paul Staines (aka. Guido Fawkes) wrote a piece on his blog that no self-respecting moderate in the Labour Party could possibly disagree with:

"On 12 September 2007 in a paper submitted to the Treasury Committee by Mervyn King, Governor of the Bank of England, he warned the City: "...the moral hazard inherent in the provision of ex post insurance to institutions that have engaged in risky or reckless lending is no abstract concept". On September 13, 2007, the Bank of England, pushed by HM Treasury and with the acquiescence of the Financial Services Authority, bailed out mortgage lender Northern Rock. What caused this about turn? Nobody in the City was surprised by Northern Rock's difficulties, but many were surprised by Mervyn King's overnight U-turn. His stated policy of avoiding moral hazard was prudent and generally accepted in the Square Mile as wise and right. Foolish risk takers should suffer when they get it wrong. In 1995 Barings collapsed. The Bank of England did not bail it out. Imagine the outrage if a Tory government bailed out the Queen's bankers, "Tory toffs looking after their own pin-striped aristocrats" would have been the charge. Central Banks should only intervene when there is systemic risk to the financial system, not to bail out shareholders when things go wrong. Northern Rock put too many eggs in the mortgage securitisation basket and offered mortgages at slim margins. That strategy is now shown to be risky and unsustainable. So why bail it out? Northern Rock is not merely the victim of illiquidity in the money markets as Alastair Darling spins, investors knew something was wrong months ago, the share price tumbled long before the sub-prime crisis made the headlines. Nor can you argue that the collapse of the Northern Rock would cause systemic crisis. The mortgages would be administered, the householders would barely notice a change in ownership and it is inconceivable that other banks would suffer contagion.

First time buyers queue for mortgages outside Northern Rock

There's no need to panic

The economic arguments against a bail out such as this have been impressively made by Mervyn King himself, the special circumstances argument is patently political spin. So isn't it more likely that this is a political decision forced on the Bank of England by Gordon Brown and Alastair Darling to spare their blushes? Northern Rock is a regional bank from Labour's North-Eastern electoral heartlands. Labour supporting figures are on the board. Sir Derek Wanless, Gordon's favourite banker, chairs the Risk and Audit committee. Sir Iain Gibson sits on both those committees and was appointed by Gordon to the Court of the Bank of England. As far back as the miners strike it has been seen as a "Labour" bank. In the eighties Conservative ministers were furious when striking miners were told not to worry about their mortgages by Northern Rock - removing a pressure on them to return to work. The Labour movement lauded them for it and for their giving of 5% of profits to North Eastern charitable projects.

Guido suspects that the Treasury pressurised Mervyn King, against his better judgment, to bail out Northern Rock for political reasons. Brown's Britain is a bigger version of Northern Rock. Gordon's macro-economic policies are Northern Rock's borrowing policies writ large. Gordon has mortgaged spending through PFI, government debt has ballooned and the consumer economy is floating on debt secured against over-stretched property prices. It can't go on for ever..." Companies that profit through risky investment and then fail to cope when the market gets tough should be allowed to go to the wall. If we back down on this principle it signals a green light to the Government financial support for coal mines, railway infrastructure, roof thatching or Enron. It's the economic madness of Stalin and Mao Tse Tung. It's the borrow-and-spend madness of the Trotskyists, LibDems and cyclists. It's no part of New Labour thinking. Those of us who are upwardly mobile because we are prepared to get on our bicycles and do an honest day's work for a living should not have our taxes diverted to allow state socialism to prop up ailing businesses.

On the other hand, Northern Rock is the financial bedrock for ordinary, poor people like me. I've got a mortgage with Northern Rock because they were the lender that was prepared to give me a 100%+ deal, i.e. I didn't need a deposit and I was able to put myself into negative equity in order to release the cash to buy smart furniture and the latest household conveniences. I don't think it's unreasonable that people who don't have parents who can afford to send a chap somewhere better than a minor public school to put up a deposit, or who have to buy their own furniture from MFI rather than from Harrods, should be able to be home-buyers. There was nothing irresponsible about me taking out the size of loan that increased the level of national debt and negative equity or about Northern Rock borrowing the cash on the unstable global capital markets and lending it to me.

Northern Rock has also been criticised for lending multiples of 5 times salary or more to borrowers. In Hackney a one bedroom flat sells at up to £500,000, so unless lenders are prepared to lend at 5x salary, no-one with an income under £100k would be able to buy. Mind you, that's only since we've been in power and allowed the property developers to run riot. Before we took over a typical one-bed flat was well within reach of even public sector employees in Hackney. What is happening to Northern Rock is an outbreak of mass hysteria amongst savers that has nothing to do with the company's business model, which was actually pretty sensible - spotting there were a bunch of people (20% of the market!) who wanted to buy but didn't have a snowball's hope in hell of ever doing so before Gordon Brown took over the Treasury, and helping them get on the housing ladder. Those people are what they call the "sub-prime market". My hunch is that most of the people retrospectively attacking Northern Rock already own several castles and can deliver pious lectures about "risky lending" without remembering what it's like to be, or to want to be, a first-time buyer. Even I can just about remember what it was like to be a first-time buyer. It's enough to make a chap think like a socialist.

Plenty of flats for yuppies to buy in Hackney

Breaking news: This evening Alistair Darling has effectively nationalised Northern Rock by underwriting all customer deposits regardless of the financial condition of the company. Whoopie! My mortgage is safe. As I don't own a car, maybe this would be a good time for the government to re-nationalise the railways as well.