Martin Kettle\’s Quite Right, You Know?

Really, he is:

In the long history of Labour as a governing party, nothing – but nothing – has been as politically destructive as financial crisis. The slump of 1931, the devaluations of 1949 and 1967 and the IMF bail-out of 1976 inflicted mortal wounds that destroyed four Labour prime ministers and sent four Labour governments to their electoral graves. Collectively these events had an even more devastating effect, cumulatively undermining the plausibility of the entire 20th century Labour governmental project and barring the way to a sustained British social democratic settlement on European lines.

Whether the run on Northern Rock of 2007 has triggered another episode to rank with those past traumas it is still too early to say.

But there is a radical option too. This says that Northern Rock proves that the right sort of government regulation and intervention will support, not destroy, strong markets and good businesses.

Quite. The right sort of government intervention and regulation will indeed support strong markets and good businesses. There\’s no one (at least no one rational) who would dispute this. All we need now is to work out what is the right sort of government intervention. On the evidence that Martin himself offers, the Labour Party has failed to get the right answer to this question four times and the result at the fifth time of asking is as yet unknown.

There is a very good argument for the right type of intervention but I\’m not sure that the above is a very strong argument for Labour knowing what the right type is.

10 comments on “Martin Kettle\’s Quite Right, You Know?

  1. “the Labour Party has failed to get the right answer to this question four times and the result at the fifth time of asking is as yet unknown.”

    Patience. Patience. Try today’s The Times:

    ” . . In an interview with The Times at the end of a week of turmoil, the Chancellor of the Exchequer disclosed that he was looking at giving Britain a US-style system of savings protection, under which deposits held in a collapsed bank would be moved into a special vehicle and paid back to savers within days.

    “The scheme, paid for by a levy on banks and other financial institutions, would be one of several measures to return confidence to the system and allow the Bank of England to carry out its role as a lender of last resort.”
    http://www.timesonline.co.uk/tol/news/politics/article2508003.ece

    Mind you, before anyone gets over-excited at the prospect of US-style regulation and deposit protection, we should note that US-style financial regulation has done absolutely nothing to prevent the emergence of the sub-prime mortgage problem, which is precisely what is causing the present turmoil in world financial markets and which is why Northern Rock’s business model came unstuck. Ah well.

  2. I don’t get it, who’s lost confidence in the financial system bar the depositors and investors of Northern Rock? I haven’t rushed to close or change my bank and building society accounts. Do I really think the odds of losing everything are lower if I have the money at home? Even if I did that and got insurance for the risk I’d still be relying on the solvency of the insurance company. It’s been an interesting episode but are people really as worried as they’re being made out to be….or am I the only one left out of the general panic?

  3. “I haven’t rushed to close or change my bank and building society accounts.”

    I have. Well, moved the money around a bit between several banks. Fear is contagious and can often bring about the very thing that was being feared.

    “Do I really think the odds of losing everything are lower if I have the money at home?”

    That assumes that people were taking out cash and stuffing it the mattress. But people were mostly taking cheques and moving the money to other banks.

  4. “people were mostly taking cheques and moving the money to other banks”

    Exactly my point, Kay Tie. People haven’t lost their confidence in the financial system, only their trust in a particular institution. Certainly spreading your money is a sound idea but then it always was and which is why I already did it. If you’ve now done that then your risk has likely lowered as a result of this debacle so from that perspective we could be praising this event as a positive step in informing the public.

  5. Bob B sort of gets close to the point, which is that credit bubbles and asset-price bubbles go hand in hand, they are two sides of the same coin.

    In the UK, it’s usually house prices that get ridiculously inflated.

    So we should wait until the bottom of the market and impose a swingeing land value tax on capital values. That’ll sort it out.

  6. “The right sort of government intervention and regulation will indeed support strong markets and good businesses. There’s no one (at least no one rational) who would dispute this.”

    Er, no. Public choice theory and all that. Any and all government intervention just supports bad businesses against competition from good ones. Why do we have banking crises like this? Because governments support a fundamentally dodgy business model (lending out scads more money than you have, while promising everyone who lent you money you can pay them all back, any time they want it, when you can’t). Banks are sheltered by governments, banks get into trouble, governments bail out banks, economy worsens, currency inflates, everyone demands greater government sheltering of banks, rinse, repeat…

    How much monopoly money would the government have printed as part of their guarantee of money “saved” (but actually loaned to a bank, who’d loaned it to other people) if there’d been a general run on the banks? Would they have just run the presses until we turned into Zimbabwe? I think we have a right to know.

    Tim adds: “The right sort”. Like a criminal justice system perhaps?

  7. Pingback: EclectEcon

  8. Tim, in response to your “add”.

    I don’t see how the criminal justice system counts as government intervention in any normal sense. It could be counted as government intervention, by that standard, in anything. For instance, the criminal justice system says I can’t murder my children, but that’s not a government intervention in childcare, it’s part of a general rule that murdering people is a Bad Thing.

    The kind of intervention/regulation under discussion here is whether governments should get involved in the market, e.g. supporting a failed business. That’s qualitatively different.

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