Sean O'Grady: How the Bank became a pawnbroker

At £50bn, and possibly much more, the scale and ambition of the Bank of England's intervention is unprecedented.

Yet, spectacular as this "initiative" undoubtedly is, there is a sense that the Bank hasn't had much choice in the matter. Because the choice was really no choice at all.

Related articles

• Can the Bank's £50bn save the economy?
• Click here to have your say
• Chancellor will urge lenders to pass on rate cuts to borrowers
• Vincent Cable: Don't be fooled... the banks aren't victims of bad luck
• RBS to pump in £12bn of new capital
• Bank bail-out loans set to total £100bn before credit crisis ends
• $6bn fund to cover bad debts at Bank of America
• Jeremy Warner's Outlook: A banking bail-out that sticks in the craw even if economic salvation requires it
• The Sketch: A tale unlikely to have a happy ending
• Leading article: The banks must pay a price for their hubris
• Search the news archive for more stories

Let the credit crisis continue, with the possibility of it tipping the economy into a deep recession, or try to do something big and dramatic to stop such a calamity from happening? The really scary moment for the Bank, and the genesis of this scheme, was the failure of Bear Stearns last month. Before that, it might have been possible to imagine that more of the same – limited "injections of liquidity" (lending to banks, and interest rate cuts) – might eventually work. The collapse of America's fourth biggest bank changed everything.

It forced the Bank to think about a way out of a crisis that had undergone a step change. Never before had the integrity of the biggest banks been threatened. Now rumours – often malicious – about collapses possessed the markets.

There were no runs, as with Northern Rock, but they might have followed such fragility in the banking system.

The only way to stop that fever was to restore confidence and order to dysfunctional credit markets. That meant clearing out the huge overhang of troubled mortgage-backed securities lying around on banks' balance sheets.

So now, the Bank has come along as a rather grand pawnbroker, and offered to give the banks cash or government securities (almost as good) in return for these infernal mortgage-backed securities.

What is supposed to happen next is that the knowledge that Mervyn the Pawnbroker will be on hand to let everyone have whatever liquid funds they might require, at any time, will make the banks more willing to lend to each other, to homeowners and businesses.

The credit crisis will ease, the economy will benefit and a recession in the UK can be averted. In that way, it might be said, the Bank of England isn't rescuing the banks, but saving the wider economy and protecting the public from the banks. House prices will probably keep falling, though not by as much as before, and painful adjustments will be made.

One thing is for sure. Mervyn the Pawnbroker isn't just giving money away. And yet many wonder whether this particular pawnbroker and his clients will ever be out of each other's pockets.