Ali’s blog

Mostly quant stuff with occasional digressions

The woes of Northern Rock

Posted by alifinmath on January 17, 2008

All the talk seems to be of the British government nationalising Northern Rock Bank; no private investor wants to touch it with a barge pole. It’s part of a consistent pattern where expenses and losses get socialised (i.e., by using taxpayers’ money) while profits remain private. We saw the same phenomenon with the S&L debacle in the US in the ’80s. The state — which should in theory be neutral — invariably comes out in support of the propertied; indeed, it’s but a front for the propertied class. One idea behind profits is that they are returns for taking on risks — the operation could also have made losses. But if the state interferes to ensure that no losses are possible, how equitable is that to those without property and access to state mechanisms?

In related vein, look at the military-industrial complex in the US: this complex prospers in a protected environment and doesn’t have to face the chill winds of global competition. Government contracts are often handed out on a no-bid cost-plus basis. The senior functionaries of these organisations have a revolving-door relationship with upper levels of the US state: people like Cheney, Rumsfeld, and Perle come most prominently to mind, but there are scores, nay hundreds, of others. Companies like Bechtel, Halliburton, and General Dynamics can literally not go under and their profits are assured. And as a consequence, the composite defence industry index is up 22% over last year. The point I want to make is that the moment we examine the evolution of Western capitalism, we see the crucial impact of the modern state. Large enterprise is inconceivable without state support: capitalists are unwilling to take the risks of large investments in fixed assets without assured markets and state support in myriad different ways (duties on imports, prising open foreign markets, legislating against organising rights of a recalcitrant workforce, being buyer of last resort, making funding available at attractive rates, passing on state-funded research at no cost, favorable tax breaks, etc.). The burden of the US state is increasingly shouldered by lower-income groups as the rich and propertied have assumed ever less responsibility for funding it; it remains, however, entirely an instrument for maintaining and increasing class control over property. This is the reality. The myth which is propagated, however, is that of the heroic entrepreneur, battling the odds to set up an enterprise and earning a fair return as a consequence.

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