Leading article: Darling's package needs to be as big as promised

After one of the worst days ever for bank shares on the markets yesterday, Alistair Darling at last promised a "full and comprehensive" package of assistance for the beleaguered financial industry before the markets reopen today. It had better be both "full" and "comprehensive" if it is to satisfy an industry which has all but siezed up completely, threatening to bring the whole economy about their ears. So far, it has to be said, neither the markets, nor the banks themselves nor the world at large has been at all impressed with the succession of interventions to date.

The Treasury, together with the Bank of England, has poured money into the market in an effort to increase liquidity and loosen lending purses. It has undertaken individual rescues, most recently of Bradford and Bingley and HBOS. And it is now reported to be considering a massive injection of capital of up to £50bn into the banks in exchange for preferred shares. Having seemed at one time to be beyond the wildest dreams of the fiancial industry, these may now be regarded as the least that needs to be done. That is how far this crisis has moved in the past month. One should not be too hard on the failings of politicians to ride this particular storm, let alone temper it. No government has a handle on the present chaos in the markets, not even the US authorities. The reality is that two tectonic plates are beginning to meet and grind on top of each other. One is the seizing up of bank lending. The other is the accelerating pace of recession in nearly all the major Western economies. It was well under way before the financial crisis fully exploded on us this summer. It had much to do with the collapse in house prices, not just in the US but here in Britain and in southern Europe.

The fear now stalking the markets as well as government, economists, businessmen and everyone else concerned with the economy is that these two forces are not only meeting but could destroy each other in the clash. A total freezing up of the financial markets would – and may already – make the pace of recession considerably worse as firms, already faced with rising costs and falling demand, can no longer obtain the finance needed to keep them in business and investing. Yet a solution to the banking crisis – even if it were within sight – won't be of much help if the recession continues to deepen and that, in turn, may not cease until house prices stop falling, which brings you back to the cost of finance and confidence.

There is simply no point in hoping that individual measures in any one sector, or any one country, are going to break this vicious cycle. You can flood the market with liquidity, as the central banks have been doing, but that won't unlock the system if the problem is with the balance sheets of the banks. You can make dramatic cuts in interest rates, as Vince Cable and many others are now urging. But that won't stop the interbank rate remaining high. You can recapitalise the banks, but that won't bring them back to lending if the market conditons are bad.

What is needed is a concerted movement on all these fronts. A sharp reduction in interest rates may or may not determine interbank rates, but it has done wonders for the Australian market and could do far more if it were done as part of a co-ordinated move by major central banks over the next few days. So too with measures to aid the banks. Recapitalisation and individual bank rescues may be a matter for each nation. But an EU-wide safety net and a scheme to mop up toxic assets is needed. There is a simple message from the past few days: the piecemeal won't do.

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