Northern Rock: The Political Impact

     

What then is the political impact of Northern Rock? First of all, should people be blaming the government? In short, no. And as far as the public are concerned, polling suggests they distinguish the credit crunch, City authorities and Northern Rock itself as the main culprits. They appear to recognise that stuff happens, as it did to Johnson Matthey Bankers in the 1980s.

However, Northern Rock is a major mortgage lender, and its failure instantly becomes a political problem. The government were left with a number of options: One, they could have allowed the bank to go to the wall. Two, they could have baled the company out and tried to find a private buyer. Or three, they could have nationalised it, in some form or another. As it turned out the government tried the second option before deciding on the third.

Nigel Lawson argues in Time magazine, that they should have cut to the chase and nationalised the beleaguered lender. He argues persuasively that a satisfactory private sale was unlikely given the instability of the financial markets. You could also add that any private deal would have left the tax-payer heavily exposed. Anyhow, after deciding to nationalise the Rock, Lawson argues that the bank should have been closed to new business, confining it to the management of its existing loan-book before selling it off piece by piece as conditions improve. Instead the bank will compete unfairly in the marketplace.

So, while it is less credible to blame the government for the failure of the bank, their handling since can be criticised. Early indicators show that the public agree. A poll by YouGov for the Economist, suggests that 51% think that the Government’s handling has been poor or awful, while only 11% thought good or excellent.

This has a number of advantages for the Conservatives. Firstly, the five month gap between the failure of the Rock and its nationalisation, can be convincingly presented as another display of indecision by Gordon Brown. In fear of the ideological overtones of nationalisation, Brown dithered around trying to find a private sale. This sticks.

Secondly, the government’s record of economic competence has been interrupted, and what is more, interrupted at a time when the economy is slowing down. The governing party can indeed benefit from a down-turn in the economy as people become anxious, but the government’s handling of Northern Rock might prevent this.

Thirdly, as a nationalised company, Northern Rock’s failings are more likely to be the focus of media attention than any successes. This could in turn have a corrosive affect on the government’s credibility. Although the failing of Northern Rock is seen as the bank’s own fault, its nationalisation and subsequent performance is very much the government’s problem.

Finally, Northern Rock is a continuing economic story that George Osborne can use to attack the government on intermittently. While it is true that the Cameron/Osborne team failed to land the killer blow over Northern Rock, it should be remembered that the Rock is just not killer blow material. Unlike Black Wednesday, Northern Rock was not a major failure of government policy.

More accurately, it appears that Labour’s monopoly over the economy has been displaced by their delayed response rather than destroyed by a catastrophic policy error. This has probably been enough however, to reduce, and in some cases reverse, Brown/Darling’s lead over Cameron/Osborne.

In terms of Labour’s economic credibility, this may not be the beginning of the end, but it is certainly the end of the beginning.