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It will be high noon at the Not OK Corral. Wyatt Brown, his faithful sidekick 'Al' Darling and the Prime Minister's new best friend 'Doc' Mandelson will face off against the bunch of cowboys known as the banking gang. The black hats will either come quietly or there'll be the blood of bankers running in the gutters of Downing Street.
That is the showdown we are being led to expect. Some in the media, encouraged by some in government, are getting excited by the prospect of guns blazing over the banks' reluctance to cut interest rates and extend credit.
Lloyds TSB and HSBC are so far the only big banks to have passed on in full the latest rate cut to their mortgage borrowers. Northern Rock, which is entirely owned by the government, is one of the outlaws. Yet ministers appear to be more aggravated with HBOS which is one of the banks expected to benefit from the government's bail-out plan.
The Prime Minister has encouraged expectations that he is strapping on his gun belt by saying: 'I think the banks should really pass on the interest rate cut.' He adds with menace: 'We are talking to the banks.'
Calculated displays of anger with the bankers are as much about politics as they are about the economy. It is not just the state of the credit market that troubles the Prime Minister; it is also about maintaining his own credibility. There is a rising clamour from his MPs for the government to give a kicking to everyone's favourite hate group. Mervyn King, whose resemblance to Fidel Castro has not hitherto been obvious, has even threatened the bankers with effective total nationalisation if they do not act to get lending flowing.
The Tories contend that Mr Brown's rescue plan is falling apart, a potentially devastating line of argument against the Prime Minister. In the chronology of the financial crisis, an absolutely crucial moment was when the government committed eye-popping amounts of taxpayers' money to the bank bail-out. It was also the critical juncture in the narrative of Gordon Brown's political recovery. That was the moment when the opinion poll sub-zero began to transform himself into the global financial super-hero. The likes of Paul Krugman, the Nobel Prize-winning economist, lauded the Prime Minister for coming up with the plan which would save the world. So it is going to be tricky, to say the least, for Mr Brown if his world-famous, patented, miracle banking elixir does not actually work.
It is too soon to say definitively that it has not. The bail-out did prevent the immediate implosion of the entire financial sector which was a gravely serious threat at the time when Mr Brown unveiled the grand plan. Without that emergency action, it is highly likely that we would have seen the simultaneous collapse of several of Britain's biggest banks.
The injection of billions of pounds of taxpayers' money kept the banking sector alive. What it has yet to do is get the patient out of intensive care. One senior minister who is currently spending most hours of his days with bank executives compares them to men who have 'suffered a massive heart attack'.
George Osborne, who also has a taste for the medical metaphor, is now declaring: 'Gordon Brown and Alistair Darling need to swallow their pride and accept that their bank rescue package needs radical surgery.' The Tories were broadly supportive of the bail-out plan when it was announced. That does not deter them from turning around two months later and attacking the plan as an abject failure.
This marks a shift of focus by the Tories back on to the economy after the diversions provided by the Damian Green affair. Some members of the cabinet were quietly rather pleased that the Conservatives decided to make such a huge issue of the arrest of the MP for Ashford and the police raid of the Commons without a warrant.
'If they want to go after the Speaker and the Serjeant at Arms rather than go after us on the economy, good luck to them,' says one senior minister. 'The public, by and large, don't give a toss about Damian Green.' An observation which may be sad, but is probably true. 'They think: these politicians are pontificating about their privileges while Rome is burning.'
Labour seeks to portray David Cameron and his shadow Chancellor as the boys who sucked their thumbs while the economy was in flames. The Tories want to paint Gordon Brown as the man who fiddled through the inferno. It is essential to the Tory strategy for winning the argument about the recession that they depict Mr Brown as the author of grandiose schemes at huge expense to the taxpayer which prove to be futile or counter-productive.
We are entering a highly hazardous period for the government when it is too late to change the course it has taken, but too early to tell whether its crisis measures are going to work. The theory behind the temporary cut in VAT is that it will leave consumers with extra money in their pockets at the end of each month. Will they spend it to keep the tills ringing in the shops? Or will people put aside any additional cash they have to meet the higher bills that the public know are coming in future?
One cabinet member tried to cheer up the Chancellor by saying that he had been in a shop where they were promoting the VAT reduction with the slogan: 'Thanks, Darling.' But we will not know until next year whether voters are going to be saying the same.
Once upon a time, a long, long eight weeks ago, the Bank of England reckoned the appropriate level for the base rate was 5 per cent. In the space of just two months, the Bank has slashed it to 2 per cent, reducing the base rate to its lowest level since Gordon Brown was born. Such desperate measures tell us that Threadneedle Street now fears that there are dire times ahead.
Even after reducing rates to their lowest level in more than 50 years, the Bank declared that this was not going to be enough. It accompanied the latest cut by saying, in its dry, bankish way, that it was 'unlikely a normal volume of lending would be restored without further measures'. It will not be clear until well into next year whether these interest rate cuts are having the desired effect of stimulating the economy. In the short term, rate cuts may even have a detrimental effect on the psychology of consumers. Members of the cabinet were recently shown polling which suggested that the public started to get deeply scared about the economy when the Bank of England made its first dramatic rate cut last month. One minister tells me: 'It made people go, "Oh ****, this really is serious."'
At the heart of the seizing up of the economy is the growing conflict between the government and the banks. Ministers have the advantage of knowing that this is a rare instance where the politicians are doing battle with a group of people even less popular than themselves. The bankers acted with reckless irresponsibility and have still not issued the collective apology for their foolishness that they owe to the country. In the hierarchy of public esteem, bankers now rank somewhere between estate agents and child molesters. There is an increasingly aggressive tone about them from within government. 'We've given them a helluva lot of money,' says one member of the cabinet, predicting that patience has almost run out. 'We've tried nudging them. We're not far off from spanking them.'
The Labour party and much of the public would certainly derive a lot of visceral pleasure from the sight of Gordon Brown putting the bank executives over his knee and taking a slipper to their pinstriped bottoms.
The trouble is that it might be emotionally satisfying without actually being at all effective in getting credit flowing again. Talk of spankings and showdowns obscures the complexity of the credit crisis. Slashing interest rates is not a one-way street to salvation. That may help those in debt, but it is negative for the savers whom the banks need in order to meet the demands of borrowers. Peter Mandelson has had to remind some of his less economically literate colleagues that there are more savers than there are borrowers. The banks need the savers if they are to restore their levels of liquidity. One senior minister highly familiar with the negotiations with the banks acknowledges that the government is not speaking to them with 'one voice' and they are being 'asked to do two contradictory things'.
Adair Turner's regulators at the Financial Services Authority are putting them under pressure to unwind the bad risks they took in the past and rebuild their balance sheets. At the same time, the government is leaning on the banks to extend lending to households and businesses in a recession. By definition, the home-owners and businesses most likely to want financial support from banks are those at greater risk of going under.
Tomorrow, Peter Mandelson will be holding a critical meeting with bank executives. The Business Secretary will more than earn his salary if he can find a solution to the conundrum. If the banks give more loans which go bad, then they will be broke again. If the banks can't be persuaded to lend, then the economy will go bust. In westerns, that is called a Mexican stand-off.
- Labour
- Gordon Brown
- Economic policy
- Conservatives
- Economics
- Credit crunch
- Recession
- UK banking sector
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