Seumus Milne writes:
As the threat of US-driven recession looms ever larger, it is state intervention that is keeping the market economy afloat. Last month, central banks coordinated action to pump billions into the global financial system in an effort to loosen the vice of the credit squeeze. This week, we have had the spectacle of state investment funds from South Korea, Singapore and Kuwait taking stakes in US corporate giants such as Citigroup, the world's largest bank, to offset the impact of the sub-prime mortgage crisis and the biggest loss in the bank's history. And in Britain, barely a decade after Tony Blair insisted on banishing any hint of support for nationalisation from Labour's constitution, Gordon Brown has finally acknowledged publicly that his government is on the verge of taking the failed bank Northern Rock into public ownership.
By increasingly common consent, this is the most sensible thing to do. It's necessary both in the interests of Northern Rock's depositors and workforce, but most of all to safeguard the £55bn in government loans and guarantees made to protect the wider financial system from the greed and folly of the bank's management. The £26bn so far lent to Northern Rock to stave off collapse is the largest sum any government has ever handed over to a private company anywhere in the world. But while the public is bearing the costs of disastrous private decisions to lend long-term and borrow short-term in a market contaminated by sub-prime exposure, it is being held to ransom by the bank's management and shareholders.
Their shares would be worth nothing if the Bank of England pulled the plug, so any compensation should clearly be the minimum the government can get away with legally - and that seems bound to be less than the public cost of a private sale. It also looks likely that a way can be found around the other main technical headache: namely, that nationalisation would push government debt over its self-imposed limit. The real issue holding back Brown and his chancellor Alistair Darling is neoliberal dogma and fear that they will be tarred with an "old Labour" brush.
In fact, bank rescues and lame-duck takeovers are far from having been any kind of Labour monopoly in the last few decades. It was, after all, a Tory government that nationalised Rolls-Royce in 1971 and Margaret Thatcher who oversaw the takeover of Johnson Matthey Bankers in 1984. David Cameron's claim that nationalisation would represent a "staggering failure" for the government is absurd. In reality, it has mainly been a staggering failure of the private sector and a captive regulator in the grip of the same free-market ideology subscribed to by Cameron and the Conservative frontbench. No wonder the shadow chancellor George Osborne and his hapless sidekick Philip Hammond have struggled to make any sense when asked to come up with an alternative plan.
But although a Northern Rock takeover should help break the nationalisation taboo, the sudden enthusiasm for public ownership espoused by the likes of the neoliberal Economist and Evening Standard should give some pause for thought. A strong case can be made for a strategic public presence in the finance sector or a publicly owned mortgage bank specialising, say, in the needs of lower-income homeowners. But there's little chance of a debt-laden Northern Rock playing such a role in a deflated housing market - and in any case, none of the new converts to nationalisation are thinking of any such thing. If the bank can be revived as a going concern rather than sold off in bits, they will want it straight back where they believe all successful businesses belong: in the private sector.
Perhaps the best that can be hoped for in current circumstances is that Northern Rock is restored as the successful mutually-owned building society it was before the carpetbaggers arrrived. There must be a risk that a nationalised Northern Rock basket-case could even reinforce the political allergy to public ownership just when the failures of privatisation and corporate-captured regulation are making the case for new forms of public enterprise and control.
Consider the experience of the last few weeks. At the weekend, new evidence emerged that the six private companies which control Britain's gas and electricity have been holding regular closed meetings and colluding to drive up prices and keep out competition, while preparing to declare record profits of £4.5bn - and this when only 4% of their customers believe they get the good deal that market competition was supposed to deliver. Britain's privatised utilities continue to do their best to confirm the 18th century economist Adam Smith's view that "people of the same trade seldom meet together ... but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices". Meanwhile, over the Christmas and New Year holidays, 200,000 passengers were left stranded because of overruns by the private contractors still tied to Network Rail and because private train operators in an expensive, overcrowded and fragmented industry didn't find it profitable to run services.
But despite such manifest failings, the government and wider political class is locked into an ideological mindset which can't conceive of a modern socialised alternative. Renationalisation of rail is supported by two-thirds of the public, and most passenger services could be taken back into public ownership at no cost as franchises expire. But the government won't hear of it and will only countenance public ownership when corporate and regulatory meltdown - as in the case of Railtrack, the Metronet London Underground consortium and now Northern Rock - makes private solutions impossible.
The Northern Rock implosion has highlighted the real nature of what's called the free market in modern capitalist economies - neither free nor transparent, and utterly dependent on state support. As the fallout from what shows every sign of becoming a wider economic crisis becomes clearer, demands for alternatives are certain to grow. Bemoaning what he calls "the rise of state capitalism", the Yale professor of trade and finance Jeffrey Garten this week declared that "the era of free markets unleashed by Margaret Thatcher and reinforced by Ronald Reagan in the 1980s is fading away". He's right, but politicians and the media have yet to catch up.
Good to see that, whereas those who have stayed in Straight Left (the undeviatingly pro-Soviet faction in the old Communist Party of Great Britain and among its nominally Labour hangers on, hence the Harry's Place line on Russia today) have logically become the neoconservative website Harry's Place, those who got out have become Real Labour.