The UK and US Governments have been plying billions of capital into the banking sector that will in time amount to trillions of dollars. All this in an attempt to kick start normal lending and borrowing of banks in the hope it will roll into the general global economy. I make the distinction between domestic and global economy as I believe that any action must be taken with a global objective to have any lasting impact. Domestic measures are likely to be smaller in scale, less effective globally and only have short term impact.

The major causality of both the US and UK government policy is the free market. The intervention by governments into the markets is a drastic action and historically always a failure. Even communist governments have recognised the enormous benefits gained by allowing free markets, encouraging global competition and investment. China has certainly gained massive rewards through its Hong Kong market. However, I have racked my brains over the last year to find an alternative solution to the Brown/Bush solutions and I believe they had little alternative.

Certainly hindsight has shown that both governments have made bad mistakes. The late recognition of the scale of the global financial crisis, the delays and debates about implementing actions hit the confidence of the markets. Again hindsight shows that if Lehmans had bee supported the banks may have been able to continue to lend with some small confidence. Equally the Northern Rock disaster was allowed to meander for too long causing customers and investors to withdraw their money at the very time that Northern Rock needed it most. Decisive government action was needed and it was not forthcoming. In saying this, what we were really needed was to maintain continued confidence in the banks, the market and the financial system as the main defence against the virtual meltdown of the banking system and the demise of many banks.

But although confidence alone would not have been enough, it might have bought more time and allowed more analysis and more considered actions. As it stands currently, the one track solution appears to be to throw as much of the tax payers money as is required into the system to support the banks.

The long term legacy of printing and borrowing more money may not be known for decades. Certainly this looks a long term inflationary measure that may only be countered by investment in business and long term growth. Could the money pitched at banks be diverted to supporting small and medium sized enterprises that are often the barometer of the strength of an economy and the ultimate wealth of a country? How much money do the banks need? Could there be a more even split between corporate growth and banking lifelines? In time we will be able to measure the effectiveness of today’s government actions.

Today, the future looks bleak and society will have to adapt to a new style of living and the ramifications of a shift in wealth within society can be enormously damaging. We can look at the ravages of depression in the late 1920’s and 30’s which ultimately created the climate for the Second World War is what can potentially happen due to a social breakdown caused by financial and economic collapse. The trillions which are being poured into banks are considered by many people a perverse action, as it looks like highly paid bankers are being rewarded for their failures, but this may in fact be an investment in preventing unimaginable social and economic disaster. In effect we are all in a battle to save the modern world from a new dark age of depression.

It has been Gordon Brown who has taken centre stage with the current strategy of saving the banks and it will be interesting to see if President Obama continues to follow this strategy. The trillions borrowed by the USA and the UK and the trillions likely to be borrowed by the EU and countries in the Far East is a gigantic gamble. There has never been a financial crisis like this and the actions being taken are unprecedented and not a guarantee of success. Today the objective appears to be protecting the banks at all cost but will it work and what will be the legacy of their actions? The clock is ticking but let’s hopes the bomb won’t go off!

By Gary Wright, MSI