Northern Rock Nationalised

The decision to nationalise Northern Rock represents the ultimate failure of the private sector to sort out its own problems arising from the credit crunch. Heavily reliant upon public investment in the entire banking sector (and increasingly upon the use of sovereign funds from overseas governments) the financial sector is no longer capable of raising funds to rescue those banks in the biggest trouble.

This is bad news. Not least because it also means that many other projects reliant upon raising large amounts of capital will also find it more difficult to proceed. Look around any UK city, and you will find a skyline of cranes putting up retail developments, swanky city living apartments, theatres and cinemas. But already many of these projects are in jeopardy. As last weekend's Guardian reported from Manchester, many of those city apartments have already come down sharply in value. There is every likelihood that new developments will stand empty for some considerable time as consumers lack the confidence to buy and mortgages are harder to find.

Equally, many commercial developments are likely to be stopped. The commercial property market started to squeal loudly in pain last month with many share prices tumbling. It's hard to see the financial sector wanting to invest in new developments for commercial property even if it had the ability to get it's hands on the levels of cash that this would require. But the reality is, cash and liquidity is now of vital importance to the banks themselves so less likely to be available for investment. That supply side crunch feeds through as both inflationary pressure (demand remains high) and as a threat to growth (by removing the funds for investment), which poses such problems for monetary policy in the UK.

So no surprise that the Northern Rock fiasco has resulted in nationalisation. But what next? Northern Rock has been actively repossessing customers in arrears in recent months. Will the Government want to take responsibility for evicting families from their homes, or will they now take an active role in leading mortgage lenders to adopt better ways of dealing with debt. Today's call by union leaders to preserve jobs at Northern Rock needs supporting, but further demands to review debt management, arrears and repossession policies also need to be urgently raised with new boss Ron Sandler.