Tony Blair once said that the government was best when it was boldest. Gordon Brown is – finally – heeding that advice. The government’s three-pronged plan
to shore up Britain’s banking system is bold and right. It is our best
hope of pacifying the financial panic, getting credit flowing through
the economy again and thus avoiding a 1930s-style depression.
The Bank of England’s half-point cut in interest rates is also welcome, particularly since it was coordinated
with other central banks. It signals that the US and Europe are finally
acting together to tackle the global financial crisis. But a larger cut
is needed soon: at 4.5%, UK interest rates are still far too high.
The
bigger challenge is to get banks lending again – to each other, to
companies and to individuals. They need enough cash to conduct their
day-to-day operations; secure access to medium-term funding; and extra
long-term capital to provide a cushion against bad debts and allow them
to lend to creditworthy borrowers.
The government’s plan
addresses all three of these needs. The Bank of England will supply
£200bn in short-term funding; the government will underwrite £250bn of
medium-term finance; and it will also inject £25bn in long-term capital
initially – and perhaps up to £50bn in total – in the form of
preference shares that pay a fixed return and protect taxpayers’
investment.
Headline writers may describe the government plan
as a £500bn bail-out, but that is completely misleading. The £200bn
consists of short-term secured loans; the £250bn is a form of
insurance, for which the government will be paid a fee; and the £50bn
is an investment that pays a return. This is not money for nothing.
And while it is certainly true that taxpayers’ money is at risk,
we will also share in the upside when the banks recover – as they are
much more likely to do thanks to the government’s intervention. Most
importantly, the risk of doing nothing – or of continuing to do too
little, too late – is far greater. If the banks went under, so would
businesses and jobs. By keeping the UK banking system afloat, the
government – acting on behalf of all of us – is giving the economy a
life raft.
Many of the details of the government’s plan are
still unclear. Ideally, the preference shares should pay a hefty
interest rate to properly compensate taxpayers and give banks an
incentive to seek private financing if and when they can. Taxpayers’
money should also come with strings attached, such as guarantees that
banks will use the extra capital to lend to small businesses and
individuals rather than pay extravagant dividends and unjustified
bonuses. And, of course, the plan must be implemented speedily and
efficiently.
We are by no means out of the woods yet. Global
financial markets are in turmoil; other governments need to follow
Britain’s bold lead soon. The UK economy has many other weaknesses:
consumers are overladen with debt, often secured against housing that
remains overpriced; unemployment is rising; food and energy prices
remain painfully high; and the global gloom is hardly auspicious for
exporters, despite the fillip of a weaker currency. What’s more, the
banking rescue package will swell the government’s already-large
deficit – although borrowing to invest in banks need not increase the
national debt in the long term. But while 2009 will no doubt be
unpleasant, the government’s actions should stave off economic
collapse. Amid all the gloom, that is certainly good news.