A welfare state for banks
WORKERS, OCT 2007 ISSUE
Before demutualisation Northern Rock was a respectable regional building society. But with constant measures of deregulation, successive governments have ripped up all the safeguards against financial chaos. After demutualisation, Northern Rock became an aggressive borrower and lender, soaring up the Stock Exchange, to a position where it arranged 20 per cent of all mortgages in Britain. As recently as 25 July, it announced a 30 per cent dividend increase.
But it has only £20 billion assets to back its £80 billion loans. (By contrast, HSBC has £450 billion assets, to back its £440 billion loans.) This was an unstable platform for sustained growth, so when 'confidence' in this bubble bank popped, savers withdrew their money. Even the Governor of the Bank of England admitted that they were behaving rationally by doing so.
On Wednesday 19 September the Bank of England said it would lend £10 billion to the banks. This is putting finance capital on welfare: our money is bailing out private capital. They depend on us.
The economy has become overly dependent on consumer spending financed by cheap credit and government borrowing. Speculative and housing market bubbles have been blown up by greed and vast indebtedness. Britons now have £1.3 trillion of personal debt. In 1997, total borrowed money was equal to 40 per cent of all annual earnings; this year, it was 140 per cent.
Two to three million Americans are at risk of losing their homes due to the crisis in the sub-prime housing market, as low introductory interest mortgage rates expire over the next 18 months. Although there are far fewer sub-prime mortgages in Britain, mortgage lenders like Northern Rock are also finding it difficult to raise the cash to pay for additional mortgage lending. So it could become harder to get a mortgage, and it could cost more – and both these expectations are lowering house price inflation.
The Labour Party has embraced Thatcherism and encouraged the debt culture, telling workers that they do not need higher wages, because rising house prices are the road to riches. Borrowing against property staved off, temporarily, the growing debt crisis. As Marx put it a century ago, after the last big run on a bank: "They are striving to make capital out of means of circulation as such through the artificial intervention of legislation, and to raise the interest rate."
But all capitalism's solutions are building bigger problems for the future. For how long will we keep bailing them out?