Nationalizing Northern Rock

Those watching the contest between New York and London for primacy as the world's financial capital will mark as a setback for Britain the decision of Prime Minister Brown to nationalize the British mortgage lender Northern Rock PLC. Under Prime Ministers Thatcher and Blair, Britain moved in the direction of privatization, taking state-owned enterprises from education to oil and transportation and either selling them or bringing in private contractors to run them. Now the program is running in reverse, with the British government moving in not simply to bail out depositors at an ailing lender, as, say, the Federal Deposit Insurance Corp. would do, but actually to own and operate the bank. In other words, a private asset is being seized by the government.

The British have tried this in the past. As David Asman pointed out the other day on Fox Business Channel, the British Labor government tried taking over ailing British automakers such as MG, Triumph, and Austin-Healey. None of them could compete with cars made by privately owned Japanese or American automakers. Moreover, the mere presence in a market of a government-owned bank could be enough to intimidate or change the behavior of privately owned banks.

Owners of an American bank, or a French one, will have to think extra hard before putting capital at risk in the British banking market to compete with a company that has the power of No. 10 Downing Street behind it. And what's to say that if their bank doesn't do well, Mr. Brown might want to take it over, too? It's one thing for a government to regulate banks, but to regulate banks while also owning one is a stretch. If Mr. Brown's new administration proceeds down this road, New Labor is going to start to look an awful lot like Old Labor did. Chalk one up for New York.