Cash, confidence...and a Government rescue

It’s hold your breath time now.
A couple of days ago I blogged about the need for politicians to step up to the bar and take decisive action to put a bottom under the financial crisis gripping our banks.
Only this morning, I was talking to a banking expert at the Nottingham University Business School about what form that action might take.
It looks like Wednesday is the day we’ll find out.
To recap, the problem for banks is that they are so worried about the property-related bad debts they might be nursing that they are reluctant to lend money to each other. That’s making it difficult for them to carry out one of the most fundamental functions of banks in the economy you and I depend on: providing credit.
The danger, as Professor Leigh Drakes made clear to me in a chat today, is not that you or I might lose the money in our accounts; no Government would let that happen to a voter.
The danger is that if credit continues to dry up then a serious problem in the financial system will become a disastrous one for all of us – for businesses and jobs.
The bizarre thing is that there is no lack of money. What has disappeared from financial markets is not cash but confidence to lend it out.
The Government has been trying to make clear for days that it will do ‘whatever it takes’ to maintain financial stability, repeating the phrase again and again. It had been hoping that those heavy hints about how far it was willing to go would be enough for the banks to regain some of their lost confidence.
It wasn’t. The vertiginous falls in bank share prices on Tuesday meant only one thing: the markets wanted to see the colour of the Government’s money.
On Wednesday, it looks like they’ll get more than a glance at the Bank of England’s vaults – they’ll get to take out some money. Billions of it.
With either hard cash, or the promise of it, lining their own vaults the theory is that they’ll then be willing to start lending to each other. If they lend to each other they can then lend more freely to businesses and to you and me.
Even if this plan works we’re still not out of the woods.
Why? Well, it’s pretty clear that the $700 billion rescue package finally passed by the US Government late last week hasn’t yet cracked the confidence issue in the American economy.
This is designed to take the bad debt off the banks' hands. It may be that the US Government will have to do what the UK Government seems to be doing here. By the same token, our Government has yet to tackle the bad debts sitting on books of UK banks. It may yet have to launch its own Toxic Assets Relief Programme.
Finally, none of this will cure recession. If it works, it may well stop recession turning nasty. But it won’t halt a downturn that was already underway.
Economically, we’re in for a rough winter, with a lot of retailers desperately hoping that cash-strapped consumers have still got something stashed under the mattress for a Christmas splurge.
They – and the banks who’ve got loans sitting inside a lot of retail businesses – will be hoping that the cash comes in to pay off some of their outstanding debt.
Come January, the banks may well be taking some ruthless decisions about whether or not to pull the rug from under those retailers.
I wonder how well those decisions will go down with a shareholder base which, by then, might well include the Government…