Remember the date. Monday 13 October will go down in history as one of the blackest days in the annals of British banking. it was the day that some of our largest and proudest private financial institutions were forced to sell large chunks of themselves to the state in order to avert total collapse.
And the dreadful prospect of the collapse of these financial institutions was not the unforeseeable consequence of some lost war, a natural disaster or the assaults of a socialist government, but was brought about by their own runaway greed and staggering stupidity.
This sweeping recapitalisation of the banks by the state marks the definitive and sorry end to a two-decade long era of light regulation for Britain's capital markets. it also challenges the assumptions and prejudices of an entire generation of politicians, steeped in the dogma that markets always work better unfettered. That much, the historians can already begin to draft.
But there is much still more to be written about the great crash of 2008 and, indeed, this particular rescue package. The most terrifying unanswered question is whether it will work in stemming the panic. We must hope so, since there is nothing left in the locker of our politicians, short of total nationalisation of the financial sector, if it does not.
Yet there would seem to be room for cautious optimism. The Government appears to have learned from the markets' disappointing reaction to the passing of the $700bn plan of the US Treasury Secretary, Hank Paulson, by the American Congress earlier this month. Removing toxic securities from the balance sheets of stricken banks is plainly insufficient to restore confidence. Rather they need to be directly recapitalised by public funds. And this aid needs to be accompanied by public guarantees of inter-bank lending. The Government is addressing these principles. The US administration and governments across Europe have indicated that they too are in the process of doing so. it would be folly to predict the end of the panic, after so many false dawns, but this British plan represents the most comprehensive attempt to stop the carnage yet.
Another, as yet, unanswered question is what the Government will do with these banks in which it now has acquired a controlling, or highly influential, share. At least one thing already seems certain. The £37bn in taxpayers' money is to be accompanied by some new restrictions on the behaviour of the bankers themselves. The Financial Services Authority sent out a very clear warning yesterday that large bonuses for traders, managers and executives will not be tolerated while these banks are using public money to survive. This is morally and politically essential. Lavish junkets for managers should also end forthwith. Using public money to support failed managements is one thing if done for the broader national good. Watching them live high on the hog at the same time is quite another.
There is much talk in the City of banks and their managements being "humbled" by what has happened. But that is not how it looks to the outside world. Remember that it is only now, more than a year after our banks first began announcing unprecedented write-downs of bad investments, that some executive heads are beginning to roll. Why has it taken so long? And why has there been so little contrition from the sector as a whole? No politician with serious ambitions for power should be in any doubt that the public mood demands more effective curbs on the behaviour of financiers in future. Better regulation is a must.
All that said, we should not be under any illusions about the scope of the package itself to return our economy to health in short order. There is no possibility of using the lending power of these banks to provide a large economic stimulus to our economy and propel Britain out of this downturn. The public sums being invested in the banks, though staggering, are simply not large enough. Most of them will be swallowed up simply repairing the banks' balance sheets.
The purpose of this public investment is, first and foremost, to stop the rot in the banking sector. The goal is to prevent these institutions collapsing, sucking still more liquidity from the global financial system and draining confidence further. The best we can hope for is that the banks will now be compelled to be less assiduous in repossessing homes and foreclosing on businesses. But it is still in our interests for the banks to lend responsibly. After all, if they make more bad loans, it will only make it less likely that we, as taxpayers, will eventually get our investment back.
It is important to retain some perspective as we enter these new and confusing economic times. First, we should ignore those who excitedly proclaim the end of the capitalism system. What we are witnessing is the death knell of a particular kind of irresponsible capitalism, which has turned markets into an object of veneration, rather than a tool. Second, we must not forget that lax lending was one of the root causes of this conflagration. Even if it were possible to resurrect that world of easy money (which it is not), there would be nothing to be gained from bringing it back.
Finally we would do well to recognise that a recession is coming in Britain, no matter what interventions our political leaders make in the markets. The boom was allowed to continue for too long. All manner of assets became overvalued. Households and businesses borrowed imprudent amounts. Recession is the economic medicine we must stomach as part of the process of returning to health. The best that yesterday's plan can accomplish is to enable us to experience a softer landing than we would otherwise be in for.
But we must not get ahead of ourselves. First the plan has to restore some small measure of confidence to markets in which, for too long, blind panic has been the ruling emotion.