'As safe as houses'? With the collapse of Northern Rock, the world that finance capital has built is looking more than ever like a house of cards...

Northern Rock: when the merry-go-round had to stop

WORKERS, JAN 2008 ISSUE

Northern Rock is not an aberration. Take the trouble to understand what is unfolding there and you open a window on the present parlous state of capitalism in Britain and the world. Finance capital has built a house of cards on the "safe as houses" mortgage market.

Once a mutually owned Building Society in which savers provided the funds for the Society to lend to others at affordable rates, while both savers and borrowers had a small say in the running of the Society, it took the path of 'demutualisation' with account holders being offered a couple of thousand pounds to encourage them to vote for this process.

Demutualisation, or becoming a commercial bank, was one of many tools dreamt up by the neo liberal capitalist economists to help capitalism stave off its own demise. There were many other tools with a similar objective, which are worth mentioning, to put the collapse of Northern Rock into the perspective of a much wider decline of capitalism.

There were the privatisations of the 1980s, pioneered under the Thatcher government and of which demutualisation of Building Societies was just one of many. These privatisations had nothing to do with efficiencies, but were intended to provide a dying capitalism with new assets, profits and markets. Remember her flagship domestic policy to sell off council houses, declaring that Britain would become a property owning democracy.

Then there were the strings attached to foreign aid, which demanded that, for example, African and other countries open their economies to western capitalist investment through privatisation of their public services, in particular water.

Then there was the exploitation of the skilled cheap labour force of the former USSR and Eastern Europe, and of course the even cheaper labour of China and India.

On the rocks: it even looks as if nationalisation (promised to be short-term) might be the eventual outcome. Photo: Workers

These "tools" for capitalism's survival were institutionalised into the European Union after most EU members followed the Thatcher model, and then into the World Bank and the International Monetary Fund. Another mechanism to keep the profits rolling in was to increase personal debt. This had the three advantages for capitalism of lending workers money to buy goods, of making workers pay high interest to banks, and of forcing workers to become even more insecure because of the now record levels of debt.

One of the latest tools in capitalism's armoury is the sale and resale of debts as a marketable commodity. This is not new, as companies have often sold on bad debts to collection companies who then send round the bailiffs or a bunch of thugs to threaten debtors or repossess their assets.

But this is now happening on a global scale. In the US, we have learnt, banks chose to lend money to poor Americans to buy homes when there was little prospect of them being repaid. These poor are known in capitalist jargon as the sub prime market. The theory is that it doesn't matter if the borrower defaults and is unable to pay as the bank can simply repossess the borrower's house, and because house prices are continuing to rise, this will be an ever increasing asset that can be resold to some other poor borrower ad infinitum.

From loan to commodity
As you can see, these sub prime loans are in themselves very marketable commodities, and so these loans were sold on to other banks around the world who all expect to make huge profits out of them.

Of course, capitalism and its governments must do whatever they can to maintain an ever-increasing price of housing. They do this by restricting the supply of housing and increasing the supply of mortgages. But this is unsustainable because as house prices increase and wage levels are kept down, it becomes impossible for first time buyers to get on the property ladder, denying the banks new buyers. And some greedy workers try to play capitalism's game and buy property to rent, maintaining their asset while deriving income.

Add to this that the mortgage defaulters are not allowed to buy again and it becomes clear that there is no one who can afford to buy the decreasing number of houses for sale, and the consequence is that the price of houses begins to fall and the value of those sub prime loans being sold around the world begins to drop in value. Given that these loans are regarded as a banks asset, the overall assets of the banks begin to fall. Banks need to borrow money to prop up their assets but at the same time don't want to lend to other banks. Hey Presto! Crash!! Pure capitalism.

Northern Rock was the first of many banks to be seriously affected by this syndrome and the only one to spark a run on the bank as depositors withdrew their savings. Northern Rock had relied heavily on commercial borrowing to finance its operation but that borrowing was no longer available because of the crisis.

As the depositors continue to withdraw their savings, because they can see what's happening, the Government in the form of the Bank of England substitutes for the borrowers, lending what is expected to rise to £50 billion to Northern Rock. Where this money comes from is anybody's guess, except that it's our money as workers who have paid taxes.

The government, as the Rock's biggest creditor, then tried to ensure a sale of the company to another bank. As the capitalist sharks began to circle, including Richard Branson and a clutch of offshore hedge funds and private equity vultures, it became clear that Northern Rock, with 'assets' of £100 billion might be sold to Branson for £200 million. Now it seems, even the sharks can't raise sufficient borrowing to fund their bargain buy. And of course private sector bidders for Northern Rock are offering cash injections that are nowhere close to getting taxpayers' money back.

Meanwhile, other banks are beginning to show signs of going the same way leading to the Bank of England, the EU Central Bank, the US National Reserve and others to offer $50 billion in loans to save them. But share prices in banks have dropped – in effect saying "that's not enough". It has fallen to the Lib Dem acting party leader Vince Cable to call for the nationalisation of Northern Rock to protect jobs and savers. However, Gordon Brown is so wedded to capitalism and the private sector that he has refused to contemplate this, as well as saying it would be against EU competition laws.

Nationalisation
Ironically, he will now be forced to nationalise Northern Rock in order to save capitalism from further decline and to try to retrieve some of the money lent to the bank. Irony is an understatement to describe a government having to nationalise something recently privatised, to save capitalism's skin.

Meanwhile, Northern Rock's CEO is getting a £2 million pension and a £800,000 pay-off. Since 2002, Northern Rock's directors have paid themselves £30 million in bonuses. The government has given the firm £30 billion so far, and it is estimated that this will rise to £35 billion by January.

PricewaterhouseCoopers audited Northern Rock's 2006 accounts, for a £1.8 million fee, giving them a clean bill of health (as it did to the Bank of Credit and Commerce International in the 1980s) after it had itself securitised Northern Rock's mortgage loans. How can a firm audit transactions in which it has an interest?

This is one of those moments when it's possible to see the parasitical and border-line criminal workings of the entrails of capitalism. If anyone wanted proof that capitalism is in terminal decline they need look no further. The question is, will we replace it with something better, or will we all go down with it?

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