Bank runs were supposed to be a thing of the past, relics of the Victorian era or the Great Depression of the 1930s. But last weekend customers queued to withdraw a reported £2 billion from Northern Rock.
Northern Rock’s chief executive Adam Applegarth whined that the bank’s collapse wasn’t his fault. “I can’t see any time when it happened before – every single market froze,” he said, describing Northern Rock’s inability to borrow money from other banks since early August.
In fact, the present credit squeeze is an entirely familiar phenomenon to anyone who knows the history of capitalism. Karl Marx described what is happening in the financial markets at the beginning of his masterpiece Capital:
“Whenever there is a general disturbance of the [credit] mechanism, no matter what its cause, money suddenly and immediately changes into hard cash. Profane commodities can no longer replace it.
“The bourgeois, drunk with prosperity and arrogantly certain of himself, has just declared that money is a purely imaginary creation... But now the opposite cry resounds over the markets of the world – only money is a commodity. As the hart pants after fresh water, so pants his soul after money, the only wealth.”
Marx could have had Applegarth in mind. Northern Rock is typical of the financial institutions that flourished during the great global housing bubble of the present decade.
What they did was exactly what US banks did in the lead up to the Wall Street crash of October 1929 – they borrowed short to lend long. Northern Rock, for example, massively expanded its mortgage lending – which is by definition long?term lending.
To finance its expansion the bank invented complex financial instruments that allowed it to sell on its loans to speculators all over the world. In the process, like the hedge funds and private equity firms, it was effectively producing new money – its own “imaginary creation”, as Marx put it.
At the start of the year Applegarth and his like were riding high. The Financial Times carried a big feature picking out Northern Rock for special mention as an “innovative” bank.
But then the housing bubble burst in the US. At the beginning of August banks everywhere woke up to the fact that not only were they stuck with huge bad debts, but so was everyone else. So they stopped lending to each other.
Now the biggest speculators, such as Northern Rock, were particularly exposed. They found it impossible to raise new short-term loans to finance their operations. It was this that forced Northern Rock into the arms of the Bank of England.
The rescue is a big humiliation for Mervyn King, the governor of the Bank. Only a couple of days earlier he had issued a letter criticising the US Federal Reserve and the European Central Bank for pumping vast amounts of money into the financial system and thus saving speculators from the results of their own greed and stupidity.
And now he is doing exactly that for Northern Rock. It’s the first time that the Bank has had to do this since the secondary banking crisis of 1973-4, when NatWest nearly went bust. Almost certainly the rescue was a result of political pressure from Gordon Brown and Alistair Darling, who have publicly associated themselves with the decision.
If you want an explanation of this U-turn you only have to notice how the “fundamentals are sound” brigade has suddenly fallen silent – apart from Darling, whose credibility is shown by the length of the queues outside Northern Rock branches.
There are already signs that the US economy is slowing down, with lower retail sales and higher unemployment appearing in the official figures.
Long ago Marx explained that the credit system – what we today call financial markets – allows capitalism apparently to transcend any limits to its expansion, only eventually to drive it even harder onto the buffers.
The housing bubble helped to lift the world economy out of the recession that hit the US in 2000-1. But the odds are now growing that it merely postponed a much bigger crunch.