The bail-out of Northern Rock raises the question: just how much of a crisis is this for the wider economy?
Certainly, at least three financial indicators point to a sharp slowdown in the UK economy. Swap spreads, the US yield curve (pdf) and the interbank-base rate spread have all had some predictive power for UK activity in the past, and all three point to falling manufacturing output in the next two years. Indeed, lower bank share prices themselves might be a portent of slower growth too.
However, recessions are a normal feature of capitalism, and possibly not a very damaging one (pdf). And we might not even get one. Company profits are generally very high. At worst, that should limit the cutbacks in jobs and capital spending. And at best it could keep the economy ticking over, and save us from this.
Instead, I suspect the biggest crisis might be an ideological one, not a material one - because the stories the more dogmatic defenders of free markets tell no longer seem so plausible, in three ways:
1. Capitalism is not as stable and self-sustaining as it seems. It needs the state to step in sometimes to protect it.
2. The big wages of some hedge fund managers and bank bosses are not a reward for great skill in judging risks, but are instead just luck; if you stand where money is flying around, some will stick to you. Indeed, what stands out from Hedge Fund Research's data is that, even before this year's troubles, many funds did worse than cash; as Pommygranate says, they're just fee machines.
3. The "stand on you own two feet" attitude is markedly absent. Everyone seems keen to blame someone else: ratings agencies, excessively cautious banks, freak events, whatever. Few are saying: "yup, I lost money; it's my own fault." The personal responsibility so beloved of rightist commentators when they write about sink estates seems lacking in the City too.
"Recessions are a normal feature of capitalism and not a very damaging one" but "capitalism is not as stable and self-sustaining as it seems"?
Posted by: Eddy P | September 14, 2007 at 01:40 PM
"Few are saying: "yup, I lost money; it's my own fault." The personal responsibility so beloved of rightist commentators when they write about sink estates seems lacking in the City too. "
No: that's just human nature shining through. It's not an argument against capitalism: the crucial point here is that the ones that DID take the risks, and didn't do their sums correctly, HAVE lost their shirts.
Whether or not they *want* to take responsibility, they just did. That's a feature, not a bug.
Posted by: Cleanthes | September 14, 2007 at 02:54 PM
Why is this an "ideological crisis of capitalism"? I am still firmly capitalistic, which is why I don't invest in hedge-funds, for example, it's my money and I'm keeping it.
I see this pending house-price & debt bubble collapse as evidence in favour of Land Value Tax, which'd keep house prices low and stable. It's the tax system that is at fault.
Posted by: Mark Wadsworth | September 14, 2007 at 03:26 PM
"DID take the risks, and didn't do their sums correctly, HAVE lost their shirts."
No, they haven't. They just got bailed out by the Bank of England, who've lent them a big stack of money at a punitive rate that's *below* the market rate.
They haven't lost their shirt, more had it dry-cleaned on the house and thank you Sir, please come back again soon...
Posted by: Neil | September 14, 2007 at 04:25 PM
...and yes, before you say it, they only took such risks because they knew that the big bad Gummint would ultimately back them up, they can't be blamed, yadda, yadda, yadda, round in cicles ad infinitum...
Posted by: Neil | September 14, 2007 at 04:45 PM
If recessions are a normal feature of capitalism, why should we expect any effect at all, ideological or otherwise?
Posted by: ad | September 14, 2007 at 08:51 PM
Rating agencies, hedge funds, NINJA loans, mortgage crises, US housing crash, credit crunch etc etc.
If you want to be really worried about something, then take a look at China's latest and largest export - inflation.
http://www.usatoday.com/money/world/2007-09-11-china-inflation_N.htm
Posted by: pommygranate | September 15, 2007 at 05:40 AM
Rating agencies, hedge funds, NINJA loans, mortgage crises, US housing crash, credit crunch etc etc.
If you want to be really worried about something, then take a look at China's latest and largest export - inflation.
http://www.usatoday.com/money/world/2007-09-11-china-inflation_N.htm
Posted by: pommygranate | September 15, 2007 at 05:41 AM
spot on Chris. The site of lines of Pensioners queueing outside Northern Rock to get their life savings out will mark a generation.
Posted by: Dipper | September 15, 2007 at 11:02 PM