Labour stakes its reputation on second gamble

[FarCenter]

Patrick Wintour, political editor, The Guardian, Monday 19 January 2009 http://www.guardian.co.uk/politics/2009/jan/19/economy-banking

As the Treasury last night finalised its second sweeping banking revival package in three months, Downing Street was preparing to go on the offensive, justifying the package not as a bail-out for the banks, but an attempt to protect companies and families trying to secure a mortgage. The £200bn insurance scheme is not for the culpable banks, but for their innocent customers, ministers will say.

The tone towards the banks is becoming more aggressive. Gordon Brown and a phalanx of ministers will say they share the frustration of the public at the irresponsibility of past lending practices, the slowness with which they have revealed their debts and their stubborn refusal in the past few months to release credit.

The tactics, however, betray a nervousness in Labour circles that the public will simply not understand why there is a second tranche of help going to Britain's bankers, who have already received billions of pounds of loans, guarantees and capital. There is also a worry that Brown's inadvertent title as saviour of the world might be slipping. Opinion polls show government popularity falling in the new year. David Cameron may be internationally isolated in his opposition to a fiscal stimulus, but it does not seem to be hurting him. A YouGov poll in the Sunday Times showed Cameron's Tories rising four points to take a 13-point lead.

Privately, something close to desperation is starting to develop inside government. After watching the slide in bank shares on Friday, one cabinet minister did not altogether joke when he said: "The banks are fucked, we're fucked, the country's fucked."

<snip>

Despite the polls and the myriad concerns over the banks, many cabinet ministers hope the current crises will ultimately expose the Tories as intellectually bankrupt. ... "I think there is no question that 2008 will be seen as a similar historical moment," said Miliband. "This is a moment of profound crisis for the idea that, in economics, as far as possible we should leave markets to their own devices; the idea that government is the problem not the solution."

<snip>

Yet, on the evidence so far, the public have not yet bought these somewhat abstract notions, and Cameron will not make the mistake of siding with bankers or opposing better regulation. Last week Cameron met William Buiter, the economist who is a keen advocate of better regulation. Buiter, according to Cameron, told him "the last time we built up this much debt was when we were fighting ... half of Europe. This time we've done it on our own. It's quite a chilling thought. This is my worry is that it's like the man in the casino has lost it all on red and you know ... what's to stop Gordon putting it all on red all over again?"

<snip>

---

London banks, the British banks and the London subsidiaries of US and continental banks, are the epicenter of the disaster. For example, it was the London subsidiary of AIG that wrote the 10s of billions of credit default swaps that had to be rescued by the US.