It is extraordinary, but very revealing, that the banks, after having had £500bn (equal to 34% of Britain’s entire GDP) made available to them by the Government (taxpayers) to preserve them and to get lending flowing again (which did not happen), have now this week been granted a further £50bn in credit guarantees to get lending re-started again to counter the banks’ threat to lend even less in the first quarter of 2009 than in the last quarter of 2008, yet there is no sign that lending is rising at all, let alone sharply as is needed, and the Government’s Mark 2 bail-out of the banks has not even been well received by the financial markets. This kow-towing to the banks’ demands without any quid pro quo must now represent the most infamous submission since the payment of Danegeld. It has got to stop. The Government has now got just two options, yet it is pursuing neither.

On the supply side, the only way left that guarantees that the necessary lending levels will be delivered, within the limited time left as the economy is shrinking fast, is to take majority control of the banks (as already with RBS and practically so with Lloyds) and/or use new publicly owned banks (starting with Northern Rock) to overcome the banks’ stubborn intransigence in continuing to give priority to their own interests against those of the rest of the economy. On the demand side, the Government can do hugely more to get money circulating again than the 2 1/2% VAT cut which has been disproportionately costly for the little it has achieved. Action on both the supply and demand sides is desperately needed, yet neither is happening.
What the resistance to taking majority control of the banks shows is that New Labour (and the Tories) are more concerned about preserving their ideology of privatised deregulated markets (even when that ideology has imploded) than saving the British economy. On the demand side the Government could dramatically restore spending power in ways that could also significantly aid its objective of reducing poverty. It could increase the State pension by 25% (annual cost £9bn) or double the £250 winter fuel allowance (£2bn) or raise personal allowances by 10% (£4.6bn) or send every household a cheque for £500 (£15bn) or give every household a voucher which had to be spent within a short time (say 3 months) and only on British goods or services. Or the Government could get more money flowing, not through borrowing to lend bu through redistribution because poor people spend a much higher proportion of their income than rich people. Removing the artificial ceiling on national insurance contribution payments, for example, would release £8.5bn, while ending higher rate tax relief on pension contributions would release £5bn to help hard-pressed people and ensure the money was put into circulation. So why doesn’t the Government adopt some of these options? Because its values are to let inequality rip and it has ideologically set its face against redistribution.
On both the supply and demand side of the economy the Government is stuck in its own prejudices. Never has there been such an urgent need for fresh thinking, uncluttered by failed ideologies, and fresh people (like Obama in the US) to deliver it.

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