It is ironic that Gordon Brown seduced Lloyds into taking over HBOS by waiving the Competition Commission rules, only to find that the takeover was a disastrous mistake which then forced Lloyds into the Government’s asset insurance scheme and effectively nationalised the bank which he was desperately anxious to avoid. It is reckoned that some 80% of the £260bn of toxic assets which required the Government’s latest rescue deal came from HBOS. Part of this forced deal involves the conversion of £4bn of preference shares, issued at the original bail-out last October, into real shares. If the bank’s existing shareholders don’t buy these shares in a rights issue, the taxpayers’ stake in the Lloyds Banking Group will rise from the current 43% to 65%. If further the Government converts the £15.6bn of B shares which Lloyds had to pay for access to the Government’s insurance scheme, then the taxpayer stake will rise to no less than 77%. Smart work, Gordon: two down, and Barclays probably still to go. But is this really the best way to get lending going again, which should be the real aim of the exercise? It cetainly isn’t.

The truth is that this policy is much more about saving the banks than saving the economy. Not only is it unlikely to get pre-2007 lending levels flowing again because banks still give priority to restoring their balance sheets over all other objectives, but the Government is actually undermining its ostensible goal of helping businesses and home-owners by leaving Lloyds free to make its own spending decisions. It is really bizarre that the arch Thatcherite marketeer, John Redwood, can say, as he did 3 days ago, that “if you are the owner of something that large and that risky, then you hire the people who run it and you tell them what you want them to do”, yet New Labour in a desperate economic meltdown caused by market fundamentalism is still determined to give untrammelled freedom to the market and the bankers who caused the collapse in the first place.
There is a further enormous risk involved in this policy. The deficit on the public accounts as a result of repeated gigantic bail-outs and rescue deals is likely to rise by the end of this year to almost double the Treasury’s most recent estimate of £118bn – perhaps to an eye-watering level of £200bn, a staggering 14% of GDP unprecedented in history. The decades ahead of tax increases, public expenditure cuts and colossal borrowing levels needing to be serviced will be an experience of economic and social pain not yet imagined.
Is all this inevitable? It isn’t. There is an alternative policy route that would be far more preferable. Instead of propping up at almost unimaginable cost banks that have been shown to be seriously corrupted by mismanagement and negligence, it would have been far better (and would still be better even now) to allow the market to mark down the value of banks full of toxic assets and then to take them over at a fraction of the price currently doled out to keep them going warts and all. Government would then be in a position on the most cost-effective basis to direct their lending where it is now most desperately needed in the economy to save jobs and to protect homeowners from repossession. Come on, Alistair, it’s never too late for sinners to repent.

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