Today the Government tried again to unfreeze the credit markets and get the banks lending again. In October, just 3 months ago, the Government spent an enormous £37bn propping up the banking system from collapse to get the banks to resume their normal function of lending to businesses and home-owners across the whole economy. The banks took the money, but did not increase lending. They reduced it in the last quarter of 2008, and are now reducing it further still in the first quarter of 2009. Now the banks are to be showered with further largesse to the tune of £50bn, offering them virtually unlimited insurance against losses on their assets. But is there any reason to believe that bail-out Mark 2, despite the eye-watering cost to the taxpayer, will be any more successful than Mark 1? And is this the best way to get lending flowing again? The answer on both counts is a resounding No.

The essence of the latest Government scheme is the offer of insurance, paid for by providing a fee or an equity stake, in exchange for a formal agreement from the banks that they will increase their lending. There two potential flaws however. One is that some big banks may decline to participate. The other is that the pricing of the insurance may ultimately turn out to be wrong , with seriously adverse consequences, i.e. it may be under-priced and the banks make a killing or it may be over-priced and then the banks are unlikely to take up the insurance offer.
The root of the problem is that nobody, including the Government, knows the extent of the toxic assets held by the banks since the latter have been extremely resistant to admitting the truth, for fear of a collapse of confidence among their investors. Estimates circulating in the City believe it could total as much as £200bn, equivalent to some 14% of Britain’s entire GDP. But because New Labour is pathologically averse to the whole concept of public ownership – it took 6 months of dithering before it could bring itself to nationalise Northern Rock – it is reduced to hosing down the banks with ever more colossal public funding in the desperate hope that the banks, the authors of this whole national calamity, will finally do the decent thing and start lending. But they won’t.
It is the supreme irony, or rather tragedy, that when the restoration of lending is now absolutely critical to the fate of the whole economy, Alistair Darling will not use the one single device which is guaranteed to deliver that lending, and at least temporarily take the banks into public control. The refusal to do so now, at such a dangerous juncture for the nation’s economic survival, shows just how ideologically perverse New Labour can be, stuck in the coils of a free markets deregulatory doctrine now utterly exploded by the event of the last year.

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