How Mr Darling lost the government’s economic reputation

The Northern Rock crisis has undermined this government’s economic reputation, and deservedly so. They have made mistake after mistake in responding the Credit Crunch and the run on the bank. I have put the main blog entries on Northern Rock from this site together so people can remind themselves of the way the crisis unfolded from last summer. The main errors (highlighted at the time on this site) were:

July 2007 It was clear that credit was too tight and interest rates were too high for comfort. “If the central banks don’t back off soon it could be quite a collapse”. The UK authorities failed to supply enough liquidity to markets or to lower rates.

August 2007 The Credit squeeze became clearer in the markets, and some more City commentators came to appreciate the dangers. The UK authorities still did nothing.

September 1-13 The Fed and the ECB were taking action to relieve the squeeze, but the UK authorities still did nothing.

September 13th The Chancellor makes a stupid speech blaming the banks for poor lending and stating firmly there will be no bail outs of banks in trouble. This was an open invitation to anyone banking with a weaker institution to remove their money whilst they still could.

September 14th onwards Government and Bank of England become lender of last resort to Northern Rock and allow this to become public knowledge, encouraging a run on the bank.

Government fails to arrange a take-over for Northern Rock before the run develops, claiming the legal framework it has put in place does not allow it to.

Government allows the run on Northern Rock to develop, and only when it is very serious does it announce the biggest guarantee and bail out ever attempted in the UK.

Government lends around £25 billion to Northern Rock without being able to assure us it has taken sufficient high quality collateral to ensure taxpayers can get all their money back.
Government fails to set out terms for the loan, including the all important question of when it expects repayment. Government fails to tell us that it has carried out usual banking due diligence and leaves doubt about what power it has exerted to ensure proper monitoring of the loan, strong covenants, and a professional approach to repayment.

Government becomes involved in shareholder discussions and decisions about finding a new management team/new shareholders for the bank and raising new equity for it. These discussions fail to produce an answer acceptable to all concerned, but drag on from September 2007 until February 2008.

Government nationalises the bank, more than doubling the taxpayers’ risk at a stroke and leaving itself open to endless legal disputes and rows about compensation and the way it will run the bank under its ownership.

What should the government have done differently? As this blog shows it should have

1. Made more liquidity available to markets and cut interest rates last summer, to prevent banks like Northern Rock being denied all access to market finance so it did not develop into the crisis we saw.
2. Not lecture the banks on their imperfections when the system was so distressed, as the Chancellor must have known when he spoke
3. Avoid any lender of last resort lending being made public, or cover the lending to one bank by requiring all banks to borrow something so the markets were not spooked about one individual bank – this could have been part of a general liquidity increase and sold sensibly to markets
4. When lending to Northern Rock understand the need to be a strong and firm lender. This meant limiting the sums, and limiting the time of the loan. It meant telling the Board of the bank that they only had so long to find alternative private sector money, and if they could not they had to start selling mortgages and running off their business book to meet the repayments required.
5. Staying out of discussion about new shareholders and new management to increase the chances of something happening, but keeping up the pressure on them to reach a quick solution by demanding early repayment tranches.

At every stage the government made the wrong call. They have now ended up with the worst possible of worlds, and will doubtless run this bank as badly as they have been running Network Rail and the Post Office. In the first case they doubled the costs of running the track quite quickly after nationalising it, and in the second case they have embarked on a large programme of closures having undermined its counters business by their own decisions.

<strong>Click <a href=”http://www.johnredwoodsdiary.com/category/northern-rock/”>here </a>to see the archive of John Redwood’s previous postings on Northern Rock.</strong>

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9 Comments

  1. Letters From A Tory
    Posted February 18, 2008 at 10:46 am | Permalink

    The Government are desperate to portray this nationalisation as the best deal for the taxpayer and the result of factors beyond their control. The Conservative Party must focus on making the public see that it was the Government that dug this hole for themselves.
    http://lettersfromatory.wordpress.com

  2. Neil Craig
    Posted February 18, 2008 at 11:24 am | Permalink

    Assuming that they do not run it as successfully as Branson would have this could be the "Spanish ulcer" that has already destroyed Brown's reputation for prudence & goes on to bringing Labour crashing in the election. It should also be remembered that this is the policy of the LibDems.

    Since you are, correctly, crowing about having been right continuously when the government have been wrong at every turn here, may I also remind that I suggested that the government should have called in the receivers. Even if the receiver had been unable to sell it off, in whole or part, the worst possible result of bankruptcy would have been better than this because the taxpayer would not have been out (

  3. anoneumouse
    Posted February 18, 2008 at 12:09 pm | Permalink

    So, do we now have a Premier league football club sponsored by the tax payer. Northern Rock is the main sponsor of premiership football team Newcastle United, in a deal which runs until 2010.

    It also sponsors the Newcastle Falcons rugby team, championship basketball team Newcastle Eagles, and the Durham County Cricket Club.

  4. Guido Fawkes
    Posted February 18, 2008 at 1:50 pm | Permalink

    I don't agree with the "flood extra liquidity" point. Nor do I think any realistic amount of extra liquidity would have necessarily save NR.

    Nor am I sure that saving NR is a legitimate policy objective.

  5. Curly
    Posted February 18, 2008 at 1:55 pm | Permalink

    It would have been better to allow Northern Crock to fail and die, the North East would have recovered, economic regeneration of the region would have been far cheaper than throwing

  6. mikestallard
    Posted February 18, 2008 at 6:33 pm | Permalink

    This is a purely political decision by Labour to save votes in the sacred North East.
    Politicians (except for the above) who are constantly in politics are told how marvellous they are, Minister. Eventually they come to believe it.
    You have done an "I told you so".
    So did I.
    The Chancellor is nothing but an Edinburgh lawyer. He knows diddly squat about money and the City.
    The Prime Minister knows about the same.
    And the EU knows even less.
    Yet they have the temerity to micro manage it.
    So all your (excellent) thoughts are (sadly) not listened to.
    It might perhaps, if you want to go back into the past, have been best for the meddling Gordon Brown to have left the City alone and not interfered with it in the first place.
    But then, Gordon knows best.

  7. Chuck Unsworth
    Posted February 18, 2008 at 9:51 pm | Permalink

    In fairness Darling is really just a talking head. All the decisions (if that isn't a gross misnomer) were made by Brown – possibly with Balls pulling the strings.

    I'd agree with Guido, in that I feel that a salutary lesson is/was necessary. The nonsense about such a collapse having a tipping effect on the whole banking community is vastly outweighed by this running sore which will continue for the forseable future.

    Before any real stability returns to that particular bank there will be ongoing grief. Redundancies are inevitable as will be much tighter controls. Tears before bed-time. That whole process will itself be continually debilitating and damaging to the reputation of Britain. Far better to have allowed the bank to collapse and get the matter over and done with. At least it would have shown some mettle and grit. Now we have the prolonged wait until the money (with interest at what rate?) is returned – if ever – to the BoE.

  8. Diablo
    Posted February 19, 2008 at 2:30 am | Permalink

    What do you think about Vince (Twinkle Toes) Cable crowing about how he knew nationalisation was the only way to solve the Northern Rock problem right from the outset?

    I think he has been very naive.

    Reply: I think he has been used by Labour. They did not wish to appear as old fashioned nationalisers, so it suited them to have a Lib Dem front running this proposal so they could appear reluctant.

  9. Maiya
    Posted March 2, 2009 at 6:59 pm | Permalink

    i couldnt believe this when i read it

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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