Whatever happened to the ‘free market’?

This was written for the UKWatch blog 

Whatever happened to the ‘free market’? The one where companies get punished for their mistakes and self-regulation kicks in. It’s ironic that a government with Brown (a ‘proselytiser’ for globalisation and the wonders of the free market) at its head should step in to guarantee £28 billion of deposits in Northern Rock. The Business Editor of the Times complains that it is a virtual guarantee that if a private buyer cannot be found, “the bank will fall into public ownership”.

But the creeping nationalisation of Northern Rock is, a humiliation for the British banking system and the Labour government. It is not a statement of strength from the Treasury, it is a salvage operation.”
The Times is careful to point out that Darling has not “reverted to socialist doctrine”. Of course, the government’s action does not add up to nationalisation, creeping or otherwise. Their calculation is that their action will stop the rot and restore confidence. However, if they are wrong, and Northern Rock collapses further it will be the tax-payer who foots the bill. And having given the same commitment in principle to other companies in the sector, it could be a very big bill indeed. No wonder the Governor of the Bank of England said today that this is an unsustainable position from which they have to work out an exit strategy as soon as possible.

For Cameron to say that the New Labour government is responsible for the situation is a bit rich, since it was Thatcher’s deregulation of the financial markets which helped to create a global financial system which is susceptible to rapid ‘turmoil’ which can have drastic consequences. However, the Iron Chancellor does bare responsibility to the extent that his ‘light-touch’ regulation allowed Northern Rock to lend at dangerous levels.

Those who praised Brown’s handling of the economy (especially trade union leaders who supported his ‘coronation’ in the desperate hope that he would throw them a few concessions) are looking a little stupid.
Those who believed that the growth of the service and financial sectors could produce a ‘sound’ economy were grossly mistaken. The greater the predominance of the financial sector in Britain, the more susceptible is the economy to the shocks in the global financial markets.

Brown’s ‘success’ as Chancellor was built on a mountain of debt, the growth of low paid jobs and worsening inequality. In order to continue its spending spree the US economy has borrowed vast amounts of money from the rest of the world. The collapse of the ‘sub-prime’ market has had a global impact because of the complex ‘derivatives’ by which this debt is cut up into packages and sold on to others. The banks will not lend to each other because they fear that these derivatives are worthless, and they fear that they will not get their money back. Hence Northern Rock can’t borrow money in the ‘wholesale’ markets.

The ‘sound economy’ of which Brown boasts is in fact completely unbalanced. There are now less than 3 million workers in the manufacturing industry. The ‘market’ naturally leads to the concentration of wealth and resources into London and the South East. In some parts of the country there are houses and no jobs, in others jobs, but few can afford the ludicrously inflated house prices. Yet Brown insists that everybody should have the ‘right’ to own a house, whilst denying Councils the right to build Council housing.

In the immediate period events will depend on whether or not the inter-bank lending market can be ‘unfrozen’. But even if the situation is stablised in the near future there is no sign than the methods employed to create massive profits will be ditched. Both this crisis and the problems with Private Equity only serve to underline that the quest for very high profit levels threatens to create ‘systemic’ problems as a result of the globalisation of financial markets, whilst having implications for the ‘real’ productive economy.

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