According to the BBC the UK Chancellor is considering a new package of measures for the UK banking sector.
The BBC report talks about a possible further “bail out”, although the objective of the “package of measures” will be to restore lending back to pre-credit crunch levels to stimulate the economy and not because there is pressure on the banks from bad debt. The government has already pumped £37bn into shoring-up struggling banks. Whilst the amount injected was sufficient to preserve the banks with their current balance sheets it was not enough to fund an expansion – and certainly not at the pre-credit crunch rates. The consequence is that despite pressure from ministers after the part-nationalisation of Royal Bank of Scotland, Lloyds TSB and HBOS, the institutions have yet to ease restrictions on new lending.

A fresh cash injection is a possibility. Treasury Sources say no decisions have been made but creating a “bad bank” where “toxic assets” could be left, or exchanged for government bonds, is being considered.

I fear the genie is out of the bottle and Alistair Darling will now have to act quickly. Who ever leaked this to the press should be given the Admiral Byng treatment for “failing to do his utmost to do his duty” to keep his mouth shut.

Assuming the banks are not still in dire trouble but simply restructuring their balance sheets to reflect the trends in underlying asset prices, then the leak of this story is bad news on many levels
1. If the package is not ready then the people involved should not talk about it as the expectation of a fresh injection will could create a run on bank shares (again) and put the government in a position where it has to act with an ill thought out plan or act at all when actually it was only the possibility of action.
2. The fundamental weakness in the pre crunch economy was a credit fuelled bubble economy… I can’t see that the Government borrowing money to give to the banks to give to the public by way of loans is anything but the economics of the madhouse. We have an asset price bubble. The only way to cure it is to reduce asset prices.
3. The reported objective of a restoration of lending to pre-crunch levels is not a desirable or credible objective – of course the more likely objective will be to simply restore growth in lending – but getting the balance will be difficult and statements like these only fuel false expectations which will back fire politically.
4. Fresh spending on bail outs will further weaken sterling and cause jitters amongst overseas investors. The UK economy is particularly dependent on overseas investors.
5. It will be harder and take longer for the UK tax payers to have their investments repaid. I have concerns that the level of borrowing once bank balance sheets are factored in takes the UK well outside prudent levels… but even more concerning (to me) is that it makes it easier for the UK Government to hide its real borrowing and to try to control the economy through other means.

Government intervention to stimulate the economy through the banking sector is fraught with difficulty and risks. Banks forced to lend to people and businesses that don’t have a good reason to borrow, will quickly results in marginal lending decisions, rate reductions and exactly the same conditions that got us into this mess. We’d be sat on a bubble which would still have to burst – but this time the tax payer would have spent umpteen billion to create the bubble.