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The Great British Bailout – what actually happened today?

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So, after the US government slashed interest rates to 2% and gave Wall Street a $500 billion taxpayer bailout, only to see all this achieve precisely jack shit as the American and international stock markets paused for a moment’s reflection before getting on with the business of falling off a cliff, guess what the UK government did today? That’s right – a £500 billion ($864 billion) bail out for the banks and a .5% slice off interest rates. After the announcement this morning, the FTSE paused momentarily for breath before continuing with its new favourite game of plummeting downwards at record speed, dropping by another 5.2%.

Here’s how today’s bailout breaks down:

£50 billion will be invested in UK banks in order to provide them with funds. In return the government will get ‘preference shares’ which give the taxpayer first dibs on earnings ahead of ordinary shareholders. Apparently banks taking part in the deal will have to comply with certain rules to protect our investment, but there are precious few details on this at present.

The government will also guarantee inter-bank loans worth up to £250 billion (in total) in order to encourage greater liquidity, along with an extra £200 billion for its Special Liquidity Scheme for banks to swap their crappy garbage assets that nobody wants for nice fluffy Treasury Bonds which are viewed as being more trustworthy.

Essentially what all this amounts to, along with the interest rate cut, is a desperate plea for banks to start lending and consumers to start borrowing, because the economic miracle of the past ten years has been based entirely on cheap credit and the only plan our government has to fix things is to get that cheap credit gravy train rolling again. The problem is that everybody is already in way too deep – even the banks now realise that continuing to throw cheap loans at the British public is not a good idea when they’re already struggling under a mountain of debt.

Ultimately, what’s happened today is that the government has put up to £500 billion of taxpayers money at risk to keep a badly flawed banking system limping along for just a little longer, and encouraged inflation with an unwarranted rate cut at a time when increasing living costs are already causing real pain for everybody.

  1. Nicely put.

    The Daily Mash has this take on it:

    http://www.thedailymash.co.uk/news/business/banks-to-lend-you-your-own-money-200810081308/

    It’s only funny because it’s true.