frontline volume 2, issue 5

Northern Rock and a Hard Place

Gordon Brown’s decision not to call a general election has certainly landed him in political difficulty. However it is the state of the British economy and of world capitalism that may cause him long-term problems. The Northern Rock crisis was a thunderbolt for British capitalism. Whilst banks have got into difficulties before, there had not been a run on a high street lender for many decades. The queues, which snaked up the high streets of many British towns spoke eloquently of the distrust that lenders had of government re-assurances that their savings were safe. Older people, scared about the future of their life savings, dominated the queues. BBC’s Newsnight interviewed some of those queuing and many remarked that they distrusted the government because it had lied over Iraq.

Northern Rock

The decision to underwrite 100% of the savings of Northern Rock customers calmed the crisis. The Brown government effectively nationalised the savings of Northern Rock customers. Seemingly relying on the market is not always the best way to manage the economy. But the tremors of the sub-prime lenders crisis, which started in the US housing market, have not subsided. So called sub prime loans allowed low-income borrowers, often with poor credit ratings, to borrow large sums of money. Northern Rock offered loans of up to six times borrowers income.

This type of financial product makes up around 8% of all mortgages in the UK. The risk involved for lenders is real. 70% of all house repossessions are from borrowers in the sub-prime area. This is even higher than the US, where the crisis started. In the US 55% of foreclosures are conducted against those with sub-prime mortgages.

The poorest in society are once again the ones who stand to suffer the most. Interest rates for sub-prime type products are set to rise sharply. The credit ratings agency Standard and Poor’s reported that “borrowers who took out two-year fixed-rate mortgages from late 2005 are facing one of the largest payment shocks witnessed since the 1990’s, even if they are able to refinance”. The BBC reported on a couple on benefits, who took out a mortgage to buy their council house, only to see their interest rates rise to 11%. They face losing their home.

Recession

The financial sector is a major employer in the UK, especially in Scotland. Banks and building societies could face profit downturns and subsequently close branches and offices. Staff could face major job losses. It is this kind of shock that could throw the UK economy into recession. Surveys show that consumer confidence is already down. That means that people worried about their jobs, their savings or their future loan and mortgage repayments are less likely to spend money on consumer goods such as cars and televisions. Chancellor Alistair Darling is set to lower growth forecasts for next year. There are similar gloomy predictions from the British Chambers of Commerce on growth in the services sector and retailers warn of reduced profits this Christmas. This in turn hits manufacturers. In the US shares are on the rise despite the credit crunch, but analysts put the chance of recession as high as 50%. Truly, capitalism is a fantasy world.

Capitalism

At the root of all of this is the worldwide reliance on the market. Capitalism time and time again fails to provide wealth or security for the many. Instead it reliably creates profit for the few. It was just such a short-term and near criminal pursuit of profit that led to the original sub-prime crisis in the US. In fact in some cases it was literally criminal with cowboy lenders falsifying documents and encouraging applicants to lie about their income.

Instead of seeing those in poverty forced into getting expensive mortgages in order to provide a roof over their head why not tackle the housing crisis in a simpler way? Socialists would build houses, good quality social housing, just like Liverpool City Council did in the 80’s. They would rebuild the manufacturing sector, providing training for young people and a solid foundation for the economy rather than the fictitious capital of the financial sector.

Internationalism

Of course none of this could be done in isolation. We live in an age of capitalist globalisation. Socialists need to build and be part of new international movements that can challenge the ruling capitalist orthodoxy. In this issue of Frontline we look at the health of the worldwide movement for global justice. We also take an in-depth look at some of those challenging capitalism and showing the potential for a fairer, more equal society. Venezuela is boldly standing up for the poor, for workers and oppressed indigenous people throughout the continent. We ask if they are on their way to socialism.

The current state of the left in Britain may make these bold plans seem fanciful. But socialists should not be downhearted as we are the only ones with a real alternative to the madness of free-market capitalism. Like Marx and Engels remarked in the Communist Manifesto, we are the spirits haunting Europe and we have not been exorcised yet.

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