Is Northern Rock Just the Tip of a Humungous Financial Iceberg?

With the news that the UK's New Labour government is planning to introduce secret public bail-outs of ailing financial institutions, presumably because public disclosure of such things will cause further destabilizing runs on banks and financial institutions, the question must be asked: just how bad is the situation in finance and banking in reality?

A huge bill of sale appears to be due after a quarter-century of ideologically-driven, laissez-faire casino capitalism über alles policymaking in which there has been far too little public oversight and far too much sleight-of-hand wheeling-and-dealing across the board(room). Instead of propping up the crumbling facade with clandestine deals involving public funds, it would be more useful to face these issues head-on and admit to the mistakes that have been made so that improved financial regulation and more sober economic policies can be adopted in future.

An acknowledgement that there were good reasons for many of the financial regulations that have been ruthlessly and systematically stripped away since the onset of the Reagan/Thatcher era would be a helpful start.

It's A Not-So-Wonderful Life for Northern Rock

There is not much amusement to be had in any banking crisis, but one thing that's been borderline hilarious is the number of people in the media and, particularly, on online message boards who've jumped to make comparisons with It's A Wonderful Life and who, in particular, have compared Northern Rock CEO Adam Applegarth to the film's protagonist George Bailey (as played by the great Jimmy Stewart). I suspect most of that comes from the famous speech Bailey makes when there's a run on the Bedford Falls Savings & Loan and he has to try to reassure the institution's panicked customers that their money is safe even though it's not actually located in the branch's vault:

"Wait a minute, now, let me tell you. Let me tell you. Your money's in people's houses! In the Kennedy house, and the MacClaren house, and in your house, and a hundred others. You all put your savings in here and then we make loans to people to buy homes and cars and other things. Now, what are you going to do? Take their homes and cars and things from them?!"

It's a spurious comparison, not just because Adam Applegarth (like any modern CEO or high-flier) is no George Bailey but because the basic problem is that it's not the average customer's savings that are tied up in people's houses so much as it is the large corporate financiers' money that funded Northern Rock's lending and its associated rapid expansion as a business. And now it's public money via the Bank of England loan that is allowing Northern Rock the margin necessary to continue its basic operations.

I'm not sure what Frank Capra would have made of all that.

Into the abyss?

We grow nearer to the end of another decade and, yet again, a meltdown within the financial markets looms. The BBC's Robert Peston seems like one of the clearest commentators on the plunging fortunes (sic) of Northern Rock. With the Bank of England having to bail out the high-profile Newcastle-based bank, various Conservative and Lib Dem MP's have gone on record questioning the Labour government's use of taxpayers' money to bail out a private enterprise. A solid point of principle (for once) and yet, without such emergency funding, might a wider systemic failure be too extreme to contemplate in a climate where fear and panic are on the increase?

Capitalism will probably survive once again but, ironically, only because the much-maligned public sector will intervene and save all those rugged individualists and self-made titans of industry from their own faulty assumptions and arrogance-fuelled mistakes.

In another point of irony - and in the interests of full disclosure - your correspondent interviewed with Northern Rock earlier in the year for a Treasury position but was turned down. While disappointing at the time, it now looks like a godsend not to have ended up with a company that could soon join an infamous list in the history of finance and banking. There but for the grace of god and all that.