Typical. After three hundred years Scotland elects an aspirational and popular nationalist government and looks to make its own way in the world, and what happens? A global financial catastrophe threatens to clobber the Scottish economy senseless. Just Scotland?s luck. It?s back to the drawing board.
Well, not quite. But the SNP government can be in no doubt about the seriousness of what has happened in the last few months. The landscape has changed utterly. The Nationalists rode to power on high employment, high house prices and a sense of optimism that was restoring the nation?s battered self-confidence. Now we will see how they cope with national disillusion as Scots discover that houses are not after all a source of free money, that you actually have to make things to have a viable economy, and that while the state can help it can?t make up for what isn?t there.
The idea of turning Scotland into a Celtic Tiger like Ireland looks decidedly sick now that the Tiger is dead and its cubs are looking to emigrate because they seen no future. Ireland made the terrible mistake of believing that a property bubble equated to real wealth. It wasn?t alone, the UK made the same mistake on an ever greater scale ? but Ireland is now faced with the mother of all crashes in a small island. Property prices are plummeting, and the Irish banks are effectively bankrupt as their extravagant loans face default.
But it is as nothing compared to what is happening in Iceland ? the Nordic Leopard that tried to buy up Britain?s high streets. Iceland became a kind of private equity island in which buccaneering bankers, who would give spivs a bad name, used cheap money to go on a leveraged buy out binge of big retail names like Matalan, Debenhams House of Fraser. They bank-rolled entrepreneurs like Sir Tom Hunter and seized trophy assets like West Ham football club. The Icelanders made Russian oligarchs look prudent. But now that their cheap money has been taken away, the Icelandic banks are collapsing one by one, interest rates and inflation have rocketed above fifteen percent, businesses can?t get loans, supermarkets are running short of currency to buy food and people have reportedly resorted to barter to sell houses because of the lack of credit. The Icelandic krona has collapsed and the betting is that it will not survive as Iceland faces national bankruptcy.
National insolvency may await Ireland too. In a state of panic last week the Irish Taoiseach took the astonishing step last week of guaranteeing all bank deposits without limit. This four hundred billion euro gamble is even more of a moral hazard than the US Treasury Secretary, Hank Paulson?s, seven hundred billion dollar bung to Wall St.. The Irish government has placed the profits of its banks above the welfare of its people by mobilising the entire nation?s financial resources in a desperate bid to bolster the share prices of delinquent financial institutions. Moral hazard is too small a word for it.
This is a tragedy for the countries involved, both of which believed they had transformed themselves from sluggish ruminants into entrepreneurial predators within a generation. The effects will be devastating and long lasting as the ?arc of prosperity? has become an arc of insolvency. It is a crisis for what might be called Celtic neoliberalism ? the idea that small countries like Ireland could slash taxes, borrow like there?s no tomorrow and go on raiding parties to the big old economies of Europe. It?s been a salutary lesson too in not placing all your eggs in one basket case: the banks. Iceland and Ireland thought that they could rely on financial expertise alone to build what used to be called ?a modern service economy? and now looks more like a pyramid selling scheme. Only fools believe that you can build an economy on inflated property prices
It?s a lesson that Scotland needs to learn too because we are too dependent on the banks for our own good. Banks like HBOS delude themselves that they create wealth by manufacturing exotic ?financial products? and generating humungous profits from irresponsible property lending. But all they do is create more and more debt, which ultimately trashes real economy. The Royal Bank of Scotland, under Sir Fred ?the shred? Goodwin went on a buying binge, lapping up sub-prime loans in America and dodgy European banks like ABN Amro. It is astonishing that, after the largest rights issue in corporate history, and an unprecedented collapse in RBS shares, Sir Fred is still in post. As is the spiv?s spiv himself, Andy Hornby of HBOS. I?m sorry: these are not the people you want anywhere near running the country.
So the SNP needs to learn how to distance itself from the banks and shun the financial pirates who brought Ireland and Iceland to its knees. The Nationalists have already damaged themselves by association, holding up these egregious examples of collective greed as national role models. This is all the more surprising because there are other rather better models which the SNP could have be looking as as small countires which have tamed their banking tigers.
Both Sweden and Norway had banking crises in the early Nineties. The Scandinavian banks collapsed after ? yes you?ve guessed it, a credit and property bubble in the 1980s that burst just like ours. The Norwegian government moved quickly, driving down the shares of the banks to zero, nationalising many and taking an equity stake in the rest. It restructured and recapitalised the banks and then sold them off, so that the Norwegian taxpayers didn?t lose and the bankers didn?t get bailed out. It was the reverse of what the Irish have done, which is to hand unlimited taxpayers money as collateral to the very bankers whose irresponsibility brought the country to ruin.
Why has there not been more discussion of the Norwegian bust? I don?t know, but perhaps it is because it carries a hard lesson: that you have to destroy the bad banks before you can rebuild good ones. Bailing out the existing banks is folly, as is basing a national economic policy on insititutions that have little financial wisdom and even less moral integrity. It is understandable that the First Minister, Alex Salmond, has like his Labour predecessors been bigging up Scotland?s banks as national champions ? they employ a lot of people. But it is a devil?s embrace which could destroy his party and destroy the country. If independence were to happen, it cannot be on the terms set by the banks. As Thomas Jefferson observed, if you let them anywhere near the seat of power: ?the banks will,first by inflation then by deflation, deprive the people of all property until their children wake up homeless?.