The Northern Rock crisis has just saved Gordon Brown's bacon. The Prime Minister should be privately pleased at the im-promptu re-enactments on the high streets of Britain of the scene in Mary Poppins where eight-year-old Michael asks the bank for his penny back. Why? Because it was a necessary corrective, a salutary scare that will avert worse horrors later on. "Later on" being, of course, the next two-and-a-half years, by which time he will have to call an election.
A run on the banks is one of the bad dreams of the capitalist societies, and even though there has not been a crisis of confidence in the banking sector in living memory (the secondary banking crash of the early 1970s does not count), the fear is still easily roused. Even if our only experience of the phenomenon is the fiction of a 1964 film musical (currently on the London stage), the herd principle of everyone trying to get their money out at once is readily grasped in a matter of seconds. Yesterday's headlines such as "How safe is our money?" (Daily Mail) and "Panic on the streets of Britain" (The Independent) seem designed to chill the blood in a way that looks threatening to Brown's reputation for stable economic management.
Yet a bit of panic may be just what the British economy needs right now. The mongers of economic doom have been warning for some time about growing indebtedness. It is one of those artificial themes used by the professional blood-chillers of the journalistic trade, who often write as if queues of worried savers are precisely the outcome they seek. But there are two sides to every transaction, and higher borrowing is just as much a good sign as a bad one. It means interest rates are low and people are confident about the future. The problems arise when people take out debts they cannot afford to repay, or if they don't leave themselves enough of a cushion in case things turn out less well than expected.
That was what happened in 1990-93, the last time large numbers of people got into more debt than they could afford. That was the time when "repossession" became a headline word. It was the unwinding of the Thatcher boom, which made it all the more piquant that the queues should form outside building society offices on the day after the Lady herself was put on display outside No 10. I believe Brown made a mistake in parading her, in any case, in pretending to be something he is not. On this, I agree with David Cameron. I am told that the Tory leader, watching the footage of Thatcher and Brown on the screens in his suite of Westminster offices, sought to calm the irritated nerves of his aides by saying: "Everyone knows that Gordon isn't a big tent person; in the end in politics, untruthfulness comes out."
The subliminal association with the years of "Tory boom and bust" was also unfortunate. The bail-out at Northern Rock is a metaphor for economic instability and seems to cut against the record of Brown's 10 years as Chancellor. Even if that impact is more metaphorical than real, it presages higher mortgage interest rates to come.
However, if the Northern Rock scare has a beneficial effect in the medium term, none of that matters. The optimistic case runs as follows. If the real threat to economic stability is people borrowing more than they can afford – or, as there are two parties to every transaction, banks lending irresponsibly – then what banks and borrowers need is a fright. If it makes borrowers think twice and lenders more cautious, it reduces the risk of an unsustainable credit bubble.
Meanwhile, because central banks know more about how to manage these crises than they used to, no one should get seriously hurt. Savers with Northern Rock are protected. Shareholders in the company will lose money, but that is the price they must pay for the poor decisions taken by their executives. That too will help other lenders rediscover the virtues of prudence. Northern Rock itself will presumably be taken over by another bank. There may be other scares and other panics at other smaller finance companies. Even if mortgage rates have to rise a little to take account of the change in the way the markets assess risk, that would be no bad thing as it might take some of the pressure off rising house prices.
House prices, of course, are another example of how economic news is always bad. On Mondays, Wednesdays and Fridays, the Daily Mail runs stories on how young people are being priced out of the market; on Tuesdays, Thursdays and Saturdays, it runs stories predicting a house-price crash and ruin for homeowners. Northern Rock, of course, is just a bigger version of the price-crash story. What a week for the patron-politician of the property-owning democracy to make her comeback appearance on the step of No 10.
The point about house prices is that they depend largely on interest rates and employment. Interest rates are still low by historical standards, and employment high, with no one forecasting much change.
So it may be tempting to write Northern Rock into a familiar journalistic story of impending doom. We are heading for a crash. Borrowing is unsustainable. The burden of paying pensions will be unaffordable. It is all nonsense. There was a stock market crash the other day, in the middle of August, when share prices in New York and London went down a lot, went back up a bit and haven't been heard of since. In any case, anyone who can predict the behaviour of markets would be making a lot of money, not writing articles for newspapers. As for pensions, Britain still has the best-funded pensions in Europe, but let us leave that discussion for another time.
Far from being a portent of doom, the troubles at Northern Rock are a sign that the system works. The company expanded too fast and unwisely; it has suffered the consequences, with minimum harm to savers. The rest of us have suffered a useful shock, a graphic reminder that markets can go down as well as up. The details will probably be forgotten a month from now, but the lesson of prudence might linger. If that takes some of the potential for overheating out of the British economy, which is already forecast to grow quite fast next year, that is probably a good thing for stability.
What is the biggest threat to Gordon Brown's plan to win a fourth Labour election victory? It's the economy, stupid. But it is not simply that he would be punished if the long boom that we have enjoyed since 1992 came to an end. People know that the fate of the British economy depends largely on what happens in Europe, America and the Far East, but that what Brown and Alistair Darling do can make a difference at the margins. The nudge to the system administered by Northern Rock makes it more likely that the economy can ride out other surprises in the next few years.
Brown was a lucky Chancellor. Now he is a lucky Prime Minister too.Reuse content