Jeremy Corbyn

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A tale of two banks

JEREMY CORBYN looks at the long-term debt culture many of us are trapped in.
ON Monday, a rather diminished Alistair Darling came to Parliament to recount the latest tale of woe concerning Northern Rock. Understandably, every north-eastern MP raised the question about the 600 jobs depending on Northern Rock in the region and the future of the bank's considerable community activities.
The Chancellor could only offer a continuing underwriting of Northern Rock's finances to the tune of £22 billion plus an undisclosed treasury loan to try to keep the business afloat.
Efforts to sell the bank have, so far, proved fruitless as the offer prices made are too low, but many people have suspicions that hedge funds which have ensconced themselves as part-owners of Northern Rock are planning to buy what remains of the business.
During the exchanges, it also became apparent that a finance company based in the Channel Islands already has first call on a considerable chunk of Northern Rock assets which, apart from its buildings, amounts to the mortgages of many thousands of people all over the country.
The whole experience of Northern Rock ought to be a big warning sign to the burgeoning secondary-banking industry in Britain.
Northern Rock's management, like the management of a number of mutual building societies, engineered a demutualisation and floatation on the stock exchange. Savers were then rewarded with shareholdings in the new bank, many of whom cashed those savings in.
The newly freed Northern Rock expanded very rapidly on a business model of borrowing money from other banks at the reduced interbank lending rate and then lending on to people buying their homes.
The model collapsed in August when the interbank lending rate rose dramatically, so Northern Rock was stuck with paying more to borrow money than it was receiving from the money that went out.
The solution to the problems of Northern Rock has to be one of proper financial controls and protection of the public interest through public ownership, since so much money has already gone into the bank. The danger is that any buyer or government, instead of maintaining the bank as a going concern, could simply become, in the words of Labour MP Jim Cousins, "undertakers."
The Thatcherite Tories proclaimed the City big bank theory and went on the rampage of destroying successful mutual savings enterprises such as Abbey National, Northern Rock, Cheltenham & Gloucester and many other building societies.
Those Mutuals that have survived, such as Nationwide, are often more popular because their customers see them as more secure than the banks.
Perhaps next time Alistair Darling comes to Parliament, he will have to tell us which other demutualised building societies have indulged in the same practices as Northern Rock and what the consequences of it are.
On Thursday, the House of Commons will be debating the second reading of the Sale of Student Loans Bill, which is the third time that governments have sought to offload student loans from the public to the private sector.
The background to this Bill was the policy of the Tories, under Thatcher and Major, of ending the general availability of student maintenance grants and of the incoming new Labour government of the introduction of student fees.
When the first student loan system was introduced in 1990, the loan was limited to £420 and, in the following years, this amount increased to around 50 per cent of the maximum support model and student loans were set at interest rates in line with inflation. Repayments were fixed on the basis of the proportion of average income earned by a successful graduate.
Not content with this diminution of public support for higher education, new Labour, after 1997, replaced grants entirely by loans and any second new loans had to be repaid on an income-contingent basis rather than the older mortgage-styled system.
Since that time, student loans have increased dramatically. Total outstanding loans in 1990-92 were in the tens of millions.
By 2006, this had risen to £3billion. The maximum loan available per student is now £4,510 and, when added to a tuition loan, the total comes to £7,580, or £9,385 for students in London.
Thus, over a three-year degree course, a student in London can complete the course with a debt of £28,000.
Whilst this is repayable at the moment at inflation-only rates of interest, there is understandable concern that many people who are not eligible for maintenance grants will leave university with huge debts or be deterred from undertaking any kind of higher education at all.
In order to reduce the government's liability for student loans, there have been efforts to sell off student loans to banking interests. The first such sale took place in 1998, when £2 billion of loans was sold.
In supporting this Bill, the then-minister Kim Howells said: "Existing student loans are provided at subsidised rates, additional subsidies will therefore need to be paid to the purchaser to reflect this."
Thus, the original sale of the first wave of student loans to Nat West markets carries with it a government subsidy paid through a private bank.
In 1999, the government sold a further billion pounds of loans to a consortium of building societies and banks and, again, subsidies were paid to the purchaser to maintain the scheme.
In the financial year 1999-2000, a subsidy of £64 million was paid by the government to the new owners. Conveniently, the then-minister Baroness Blackstone said that the agreement between the government and the new purchasers was "commercially confidential."
The latest student loans Bill stems from an announcement in the 2007 budget, Gordon Brown's most recent, with claims that it represented better value for money to sell the loans and that he expected loans sales to reach £6 billion by the end of the decade in 2010-11.
This 12-clause Bill enables the Secretary of State to enter into arrangements to sell the loans and to continue a subsidy system to the company that buys them. It also allows the purchaser to sell the loans on to somebody else at another time, although the Secretary of State does retain reserve powers to prohibit such a sale.
The current total student loan debt has risen to £18 billion and is expected to reach £55 billion by 2017. Most students are expected to repay their loans within 13 years of their graduation, although many take much longer than that, depending upon their work and income.
The background to all this has been the way in which public responsibility to higher education has been reduced and students forced into an US-style loan system.
Political opposition to the loans did mean an increase in the grant system after the last big parliamentary debate but, quite clearly, the government does not intend to extend grants any further and envisages more and more loans being taken out.
The reality is that the sale of these loans brings an immediate cash injection to the government but commits the public to a long-term subsidy of the private sector, which in turn has powers of collection of the loans from graduates.
In response to the Bill, NUS president Gemma Tumelty said: "The fact that the government is, yet again, selling off the student loan book raises questions about the long-term sustainability of a funding system that encourages long-term debt. Recent events in the US show the risks associated with selling off debt and the consequence it can produce in the wider economy."
This week, we have seen the price being paid for new Labour not confronting the whole free-market ethos that the Tories bequeathed us in 1997, thus we are putting large amounts of money into supporting the private-banking industry to prevent other banks from going under and selling student loans as a quick fix.
The losers in all of this are likely to be those who have worked hard at college and the winners are various sections of the banking and financing industry.
Jeremy Corbyn is Labour MP for Islington North. He can be contacted at corbynj@parliament.uk