Sunday, February 24, 2008
Still waiting to be hammered by the Rock
Posted by David Smith at 06:30 AM
Category: David Smith's other articles


Timing is everything in this game. Within hours of last Sunday’s piece, saying one key element of Alistair Darling’s recovery plan should be avoiding the nationalisation of Northern Rock, he was announcing that very thing at a hastily convened Treasury press conference.

A week on, I have not changed my mind that it was the wrong thing to do. It appears that once the Office for National Statistics had decided Northern Rock’s debt had to go onto the government’s books come what may – guaranteeing that one of Gordon Brown’s fiscal rules would be broken – the game was probably up for the private-sector solutions.

If the private sector could not take on the risk, it was not going to be allowed to get its hands on the return. The Treasury, in pursuing the private-sector option until last weekend, may have been going through the motions.

The question of whether the proposals from Virgin or the Northern Rock board could have generated greater long-term value for taxpayers went out of the window, sent packing by the political fear that in a few years’ time Sir Richard Branson would be partying off the profits on Necker Island.

It may be that Ron Sandler, Northern Rock’s new nondom executive chairman, and his team will do a great job. He has called in McKinsey, the consultants, which some will applaud, others not. But many talented business people have foundered in the public sector – Whitehall doesn’t usually know best.

The Northern Rock crisis is about more than Northern Rock. For days commentators have been scouring the historical record for parallels. Most of us do not stretch back as far as the last big bank run, Overend & Gurney in the 1860s. The secondary banking crisis of the early 1970s is more familiar territory.

Then, as now, the global economy had been through a period of exceptionally strong growth. Commodity prices were soaring. Nationalisation was already in vogue. When, in 1973, secondary banks got into trouble after overlending on commercial property, the Bank of England organised a lifeboat to bail them out and took some under its wing. The crisis marked the start of the damaging economic instability and the “stagflation” of the 1970s.

Another candidate, at least in terms of reputational damage to the government and Britain, was Black Wednesday, September 16, 1992. Norman Lamont, chancellor at the time, insists its role has been exaggerated in the telling.

He would say that, but he has a point. Labour went into a big poll lead immediately after but a year later it had halved. Really big Labour leads did not come until Tony Blair became leader and the Tories tore themselves apart over Europe and sleaze. And Black Wednesday had a happy economic ending: Britain did infinitely better outside the ERM (exchange-rate mechanism) straitjacket.

So what will we think about Northern Rock in a couple of years? Will it be regarded as a housekeeping exercise well on its way to resolution as the debt is paid off? Will it be seen, like the secondary-banking crisis, as marking the beginning of a period of the “great instability”, replacing the great stability of recent years? Could it be that Labour will soon be tearing itself apart, as worried MPs start to speculate openly, not just about Darling but about Brown?

As far as reputation is concerned, the damage was done before last weekend. Brown, having enjoyed high approval ratings throughout his chancellorship, slipped at the final hurdle. Conservative claims that his final budget in March last year was a con trick (the income-tax cuts that weren’t) hit home.

By summer, the new prime minister’s honeymoon gave Labour a small lead in the monthly question on economic competence - who do you trust to raise your family’s standard of living? - run by YouGov for this newspaper. That fell away in the autumn, due to Northern Rock and the wider credit crisis. But a Populus poll for The Times , since the nationalisation announcement, shows Labour back in the lead.

The main conclusion from the polls suggests, however, that voters have a “plague on all your houses” attitude on competence, favouring neither the Tories nor Labour. The government is suffering but the opposition is not yet presenting a convincing alternative. This is why Brown’s advisers think that, if Northern Rock is seen ultimately to have been well handled, it will do the government a lot of good.

What matters most is the kind of economy we will have over the next couple of years. Kate Barker, the longest-serving external member of the Bank of England’s monetary policy committee (MPC), gave a gloomy assessment last week.

Perhaps it was because she was back in her native Stoke but she struck a downbeat tone, warning that “a prolongation of the present difficulties in accessing wholesale funds could restrict the quantity of mortgage lending during 2008 . . . feeding back into a decline in the housing market, somewhat lower consumer spending, and also into lenders’ balance sheets, reducing lending capacity further”.

These are the negative feedback effects the Bank is worried about and which would also have implications for Northern Rock. She went on to warn that a severe credit tightening could hit growth hard, in a way that “could prove difficult to turn round quickly”.

The MPC is singing from the same hymn sheet. Andrew Sentance, in a speech on Thursday in Exeter, addressed head-on the question of whether there would be a recession. His conclusion was there would not be, at least in terms of an outright, year-to-year drop in GDP. But he warned the slowdown in growth might be “more significant and sustained” than any in the inflation-targeting era, which stretches back more than 15 years.

Sobering stuff. We are, however, mainly still waiting for the slowdown shoe to drop. Somebody needs to tell Britain’s shoppers that tougher times lie ahead. Retail sales volume jumped 0.8% last month and was 5.6% up on a year earlier. Sales of household goods rose nearly 10% in the latest three months, their best for six years.

In industry, the CBI said manufacturers were enjoying their longest run of sustained demand for 12 years, measured by the orders balances in its monthly surveys. The good news on tax revenues, something I touched on last week, did not speak of an economy weakening sharply. Revenues are a backward-looking indicator but their 12% annual rise in January was impressive.

There are plenty of storm clouds gathering, which will determine how much trouble the economy is in. So far, however, the worst is holding off. And the government will still hope to avoid being hammered by the Rock.

PS: Immigration is fascinating, and a new report from the Organisation for Economic Cooperation and Development, A Profile of Immigrant Populations in the 21st Century, has some juicy nuggets. We forget that Britons are often other countries’ immigrants. Three million of us live in other OECD nations.

Of these, worryingly, 1.1m are highly skilled people exports, educated to degree or diploma level. Some 340,000 of our highly skilled emigrants are in America, the world’s main people magnet.

Does Britain lose out from this brain drain? We produce doctors, nurses, business people and engineers for the rest of the world. But we are also a big importer of such people.

The figures show a curious recycling exercise. Some 1% more highly skilled foreigners work in Britain than highly skilled Britons work abroad, a surplus of 11,000.

Britain is a net exporter of the highly skilled to advanced economies; 14.9% of ours work in other OECD countries while only 6.5% of the highly skilled here are from there. We import skilled people from less advanced countries – they are nearly 10% of the highly skilled in Britain. To compensate for our brain drain, we drain developing nations. Not good.

From The Sunday Times, February 24 2008