It seems to me that the fundamentals of this problem have left policy makers with few sensible choices.
The Government was right to step in last autumn to save Northern Rock – protecting depositors and stopping its problems spreading to other parts of the banking system. Alastair Darling was right to properly test all options for the future of the bank. The Treasury had two detailed proposals on the table and they are now taking a hard-headed choice in the best interests of the tax payer. The Chancellor has clearly decided that under current market conditions the private equity options failed to deliver sufficient value for money for the tax-payer. So bringing forward legislation to take Northern Rock into a period of temporary public ownership is the right decision.
The fascinating thing about this affair is how it has exposed David Cameron’s uncertainty when faced with tough choices. The Tory leader’s response to Northern Rock would have won an Olympic medal for back-flipping.
He began by welcoming the loans and guarantees made to Northern Rock. David Cameron said â€˜we support wholeheartedlyâ€™ this approach (Daily Telegraph, 16 September 2007), with George Osborne adding â€œthe guarantee that he [Mervyn King] put in place on Monday night was necessaryâ€¦â€(20 Sept, Channel 4).
That was then. This is now. Since then, Mr Cameron and Osborne have opportunistically sought to avoid the implications of the loans and guarantees they so strongly endorsed.
They have failed time and again to come up with a credible answer to the question: what would you do? The Conservative leadership have variously advocated nationalisation, restructuring by the Bank of England, private sale and now its administration again. They’ve changed their position, sometimes several times in the same week.
In mid-January, Cameron began by saying nationalisation would be a â€œcomplete humiliation and failureâ€ (Andrew Marr Show, Sunday January 13 2007), but by the following day, when asked about nationalisation and administration, he shifted position to say: â€œclearly the Government will have to look at alternativesâ€¦ they have to look at both of those.â€ (David Cameron, press conference, Monday 14 January 2008).
The next day, George Osborne had again shifted the position back towards administration, saying: â€œI donâ€™t think nationalisation of a bank is going to be the best option for the taxpayer. I think there are other options. We need to look at administrationâ€ (George Osborne, Newsnight, January 15 2008). Clearly forgetting that in November he had criticised administration, saying: â€œthe winding up of the bank would pose a significant risk to the taxpayers money â€¦ and of course significant risk to the jobs of those people who work at Northern Rockâ€ (George Osborne, Sky News, 19 Nov 2007).
John Redwood helpfully spelt out what the Tories preference for administration would mean: â€œputting Northern Rock into administration could lead to a fire sale of assets and might result in taxpayers not getting all our money backâ€ (John Redwood blog, 15 January 2008) though to be fair to John, he also condemns nationalisation. You’d expect him to do that of course. At the end of the day, he is John Redwood.
So whatever your view of the decision today, the Tories’ current position is the worst of all worlds, though of course, it could always change again by tomorrow. Administration is the very worst option you could take – risking a fire sale of the assets at one of lowest points in market and huge loss of money to taxpayers.