A bad day for democracy and the North East

Yesterday saw another successful government attempt to stifle debate and prevent serious consideration of an important billon bank nationalisation. I was left with just six minutes to try to discuss all the wide ranging issues involved during the Second Reading debate on the principles, whilst the perfunctory two and a quarter hour committee stage left completely inadequate time for all the amendments we needed to consider.

It was a pity. It was a pity for the North East, and for all who wish to see Northern Rock given a chance of a decent future. It was a tragedy for taxpayers, who will now be required to buy a mortgage bank by a government that seems to have no concern for what it is buying, and no idea of how much it will cost taxpayers over the next couple of years.

I would have liked to have spent more time discussing the importance of Northern Rock to the North East, and how the North Eastern economy could be encouraged to branch out more into the usually profitable and successful world of financial and business services. It is good news that Northern Rock took root there. It is bad news that it should be Northern Rock that got into so much financial trouble, and bad news that there are few other large financial institutions anchored in the North East.

We had no chance to look at the way the Bank and government last summer failed to keep markets liquid enough. The Fed in the USA and the ECB in Euroland did a much better job supplying cash to their markets, so no European or US bank got into the problems Northern Rock faced.

We had no chance to discuss the impact of Gordon Brown’s decision to take banking supervision and government debt management away from the Bank of England. In the Conservative Economic Policy Review we warned that once times got more difficult in money markets the UK was uniquely vulnerable to a banking crisis because these reforms left the Bank of England unable to respond quickly in the way it could have done prior to the Brown changes.

Last August we stated in Freeing Britain to compete:

“We are concerned about the division of responsibility between the FSA and the Bank over banking and market regulation. Fortunately, conditions in the last decade have been benign internationally, with no serious threats to banking liquidity. We think it would be safer if the Bank of England had responsibility for solvency regulation of UK based banks, as well as having an overall duty to keep the system solvent. Otherwise there could be dangerous delays if a banking crisis did hit, with information having to be exchanged between the two regulators; and there might be gaps in each regulator’s view of the banking sector at a crucial time, where early regulatory action might have spared a worse problem”

If the danger was obvious from Opposition, why couldn’t the government see it? Why was the Chancellor lecturing the banking sector on how they had misbehaved, and telling them there would be no bail outs, on the eve of this crisis which triggered the biggest bail out ever mounted in the UK? Indeed, there were rumours about which bank was likely to get into difficulties first in the credit crunch; before the run on the Rock began. We did not repeat the rumours because we did not wish to make life more difficult for that institution.

At this late stage, I still urge the government to consider the serious alternative to nationalisation – the Bank of England acting as Northern’s bank manager, until Northern Rock can repay the state loans and refinance itself elsewhere. It removes all the hassle of a government having to take a public view on repossessions, new mortgage offers, staff numbers and pensions. It gives Northern Rock a better chance of a decent future, as it puts some real financial discipline into senior management that is usually lacking in a nationalised industry in the UK. It protects the taxpayer better, and gives more chance of saving and creating new jobs in the North East.

Nationalisation has proved a long and lingering run down for all too many businesses to fall under its spell. Last night there were no reassurances from Ministers about the future of Northern Rock jobs, and no statement of whether they will be running the Bank down or trying to build it up. I suspect they do not know, because so much rests on what the European Competition Commissioner will let a public sector Northern Rock do. It is a pity the government did not settle that first so they could tell Parliament and public, before committing us to such an expensive and a hazardous project as nationalisation.

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16 Comments

  1. Posted February 20, 2008 at 11:18 am | Permalink

    Is it not time for someone to ask the question, what is the relationship between HM Treasury and Law Debenture Corporation plc who ultimately own Granite the special purpose vehicle controlled by Northern Rock.

    and how does it relate to the Nrthrn Rock PensSchm?

    (a link to a ) Letter to Scheme Members issued on the 11th of January
    http://www.reuters.com/article/pressRelease/idUS6

    Where the Trustees and the Company agreed to appoint The Law Debenture
    Pension Trust Corporation plc as an independent professional trustee.

    (Sentence left out)

  2. Dave Morrison
    Posted February 20, 2008 at 12:19 pm | Permalink

    I know very little of banking practises or indeed their policies but it seems to me that thay 'Northern Rock' were just greedy and tried to cash in on some cheap money without testing the temperature of the Economic Climate. In effect they misjudged the 'Risk' factor by allowing the greed factor to dominate.

    (message shortened-ed)
    Dave

  3. Richard
    Posted February 20, 2008 at 3:10 pm | Permalink

    Very clear and incisive anaysis, if I may say so, Mr. Redwood. If there is no seat for you at the Shadow Cabinet table, George Osborne and David Cameron could benefit from your experience in the sphere of business and finance. Of course it was a major blunder for Gordon Bean to disconnect the Bank of England's close oversight and scrutiny of the City's banks in 1997. Hindsight is perfect vision ? Read 'The City of London 1945-2000' by Robert Kynaston for a flavour of the power exerted by The Old Lady of Threadneedle Street in the post-war years.

    In matters of the way the City runs most efficiently, this government are totally out of their depth; so much so that the prime minister should henceforth be known as Gordon Drown…

  4. Posted February 20, 2008 at 3:14 pm | Permalink

    Agree entirely with you on Northern Rock. I used to be chairman of a public company. Some of my employees asked for loans with no collateral. I refused. I would have referred them to Northern Rock. Bad PR to foreclose. Bottomless pit behind them. Hooray at Club Irresponsible again.

  5. James
    Posted February 20, 2008 at 5:08 pm | Permalink

    Why would having the Bank of England running the bank make the slightest difference to the disciplines facing Northern Rock? Wouldn't it mean the taxpayer was owed just as much money, but had no say in its running? Or are you saying the taxpayer loans would immediately be put on commercial terms? Then surely Northern Rock would close.

    Reply: I am not asking for the Bank of England to run NR, just to be a proper tough bank manager to it.

  6. newmania
    Posted February 20, 2008 at 5:25 pm | Permalink

    A master

  7. Geoff C
    Posted February 20, 2008 at 6:36 pm | Permalink

    The Government as bank manager? We then have all the exposure and no control. Doesn't sound very attractive to me, nor to all the other institutions who would have to compete with this bank with near infinite pockets. The taxpayer would probably end up with a huge loss, but only after the managers had richly lined their pockets and pensions (remember Rover?).

    Reply: On the contrary – bank managers have considerable power to get money back they have lent to cuctomers.

  8. Matthew Reynolds
    Posted February 20, 2008 at 7:00 pm | Permalink

    Dear John,

    Simon Heffer is right ! You ought to be Shadow Chancellor ! Your brilliant response to Labour incompetence on Northern Rock and the fiasco over Non Dom Tax & CGT prove that you are the only Tory MP with the brain , courage and capacity for hard work needed to beat Labour on the economy . I have been a fan of yours & have watched Tory shadow chancellors sink without trace ( with the obvious exception of Michael Howard ) since 1997 . Will David Cameron show the kind of commonsense that other Tory leaders have lacked since 1997 ?
    Kind regards
    Matthew

  9. Matthew Reynolds
    Posted February 20, 2008 at 8:00 pm | Permalink

    Dear John,

    Simon Heffer is right ! You ought to be Shadow Chancellor ! Your brilliant response to Labour incompetence on Northern Rock and the fiasco over Non Dom Tax & CGT prove that you are the only Tory MP with the brain , courage and capacity for hard work needed to beat Labour on the economy . I have been a fan of yours & have watched Tory shadow chancellors sink without trace ( with the obvious exception of Michael Howard ) since 1997 . Will David Cameron show the kind of commonsense that other Tory leaders have lacked since 1997 ?
    Kind regards
    Matthew

  10. Andy G
    Posted February 20, 2008 at 8:39 pm | Permalink

    Is Mr Redwood trying to play some hilarious joke in commenting on Northern Rock. His latest recommendations to the Tory Party are for less, rather than more, financial regulation.

    Under his stewardship the entire banking system would probably have collapsed by now.

    Another reason why the Tories should go back to school and pass a GCSE in Economics.

    The solution to NR is very simple. The share holders lose everything and the four main high street banks pick up the tab for the savers. Easy; job done.

    Reply: You are completely misinformed. Try reading the Economic Competitiveness Review, instead of relying on wrongly informed journalists. You will see there a critique of the current regulatory structure for banks, and proposals for one which could have prevented the Rock crisis.

  11. James
    Posted February 20, 2008 at 9:21 pm | Permalink

    What happens if Northern Rock doesn't follow the Bank of England's tough love act?
    Reply: They would. The Bank would have enough charge over assets to be able to protect taxpayers.

  12. Stuart Fairney
    Posted February 20, 2008 at 10:06 pm | Permalink

    Slightly off topic posting, but speaking of bad days for democracy, Radio 5 had a tory MP on this evening who had been part of Hilary Clinton's campaign team until a few days ago! I mean ~ HILARY CLINTON ? and him, suposedly a tory! Now I know the Republicans have gone all big government, over-spending liberal, but that's all the more reason to back Ron Paul not (unflattering desciption for Mrs Clinton!).

  13. mikestallard
    Posted February 21, 2008 at 9:43 am | Permalink

    If you are too arrogant to ask, then you lose your way – and that is exactly what has happened to the government on this one.
    My question is this: which bank is next? You are so right that the FSA, Bank of England and Treasury are far, far too slow to deal with sudden challenges.

    Reply: I hope none other at the moment

  14. Posted February 21, 2008 at 10:38 am | Permalink

    Why isn't George Osborne making a song and dance about the fact that you covered the possibility of a serious financial meltdown last year? Seems like a perfect way to show that the Conservatives can back up the rhetoric with the policy.
    http://lettersfromatory.wordpress.com

  15. Stuart Fairney
    Posted February 21, 2008 at 5:04 pm | Permalink

    I am uncertain what is meant by the addendum to the post? There is no description of Mrs Clinton at all? Am I required to flatter her?
    NO, of course not, but I try to protect contributors by deleting very contentious language.

  16. Adam
    Posted February 22, 2008 at 12:55 pm | Permalink

    I agree with 'Letters from a Tory' 21 Feb @ 9:38

    The Conservatives should be shouting quotes from 'Freeing Britain to Compete' from the roof tops.
    Labour attacks us saying 'The tories haven't had a plan since the NR crisis first hit'.
    This is untrue and furthermore we had a plan before it hit.
    I met Ken Clarke before xmas and he made it clear that George Osbourne was making use of his experience. I hope the front bench team make at least equal use of John Redwood.
    Those regular readers of this blog who are sympathetic to the arguments of the centre right will be well aware that there is no need to 'decontaminate' John. He is an intelligent and caring man who wants the best for his country.
    Mr Redwood reestablishing a high profile would inevitably provoke Labour jeers concerning vulcans and Welsh singing. This will lead the public to wonder on which benches the practioners of 'student politics' really sit.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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