It was a different Prime Minister who stood up yesterday for his first Commons question time since the summer recess. Gone was the air of defeat, the sheer weariness that marked his last appearance. In its place was the confidence, the command of dense detail (too dense at times) and the sense of authority that we saw when Gordon Brown was Chancellor and the economy was happily expanding. Well might he feel a new sense of achievement.
Yesterday's financial package was as big and as bold as he claimed – £50bn to help recapitalise Britain's banks, £200bn of extra liquidity to keep the wheels of finance turning and an astonishing £250bn of guarantees of medium-term finance for the banks. Add to that a 0.5 per cent reduction in interest rates as part of a co-ordinated movement by western central banks and you had a package which met almost all the demands made of the Government over the past few weeks to tackle deteriorating economic growth, seized-up financial markets and persistent rumours of bank failures to come.
However, while it may be enough to satisfy his critics, especially within Parliament, will it be enough to satisfy the markets? That is a more difficult and less certain question. The bailout was well received by City leaders but not their traders, who marked shares down by more than 5 per cent after an even greater fall on Tuesday. Nor did the interbank rate – the market for lending between banks which has caused so much concern – react with the immediate easing that the Government might have hoped.
A welcome package but still slight in the wider picture of collapsing confdence and growth, the dealers seemed to be saying. Which may be as good a verdict as any for the first day.
"Historic", "mammoth", a "dramatic return to state intervention" – all these phrases and comments were applied to this deal in its immediate hearing. And strictly speaking they are correct. In sheer numbers and the degree of policy reversal, this is unprecedented. But one should be careful not to be carried away by the hyperbole.
In political terms, it may mark a remarkable return to state intervention after decades of "the market knows best", but it is not nationalisation in a classic sense. Rather it is a huge injection of funds into just eight banks in return for preferential rights to dividends in the case of capital investment, commercial rates of return in the case of short-term loans and a fee in the case of the guarantee of medium-term bonds.
The Treasury's concern for limiting taxpayer exposure still reigns in this deal as it did in its handling of Northern Rock, a point which may help explain the continuing reluctance of the Chancellor, Alistair Darling, to offer unlimited guarantees for depositors. The overall risk to taxpayers is considerably less than the figures imply. But the potential risk is there and so is the weight it places on government finances. By helping the banks, the Government is reducing its ability to help the economy and the citizen more directly, as wil become clear when Mr Darling makes his autumn statement next month.
In return for this, the Government isn't going to take over the management of banks. It can't. All it can do is promise to supervise them more closely, which Mr Brown and Mr Darling both assured the Commons it would do. As for the promises of taking active control of executive pay and bonuses, this would seem a pure case of window-dressing. The market will determine a change in the remuneration culture of banks if the profits are no longer there. Micromanagement of reward by the state is as ridiculous as it is pointless, and it was sad to see the leader of the Opposition leading this particular jig for the gallery.
In reality, this is a measure forced on the Government by the exigencies of circumstances. It had to do something if the wholesale markets for bank and business funding was not to dry up entirely. It has gone some way to meeting the size of the bank funding problem in Britain, particularly in the provision of garantees of medium-term loans to banks, their biggest single concern.
Particularly welcome has been the associated, internationally co-ordinated cuts in interest rates. They may not have been vast, or enough to restart the wholesale markets. But, contradicting all the recent rules of bank independence of action, it is both a sign that governments worldwide are turning their attention to the deeper problems of recession, and that they are beginning to deal with it. After months of confusion, dithering and global discord, at last the authorities seem to be grasping the magnitude of the problem.
But this is just the beginning. It will take time for even the financial part of the problem to be worked out, for UK banks to recapitalise and financial institutions to take advantage of the $700bn toxic debt bailout in the US. The next part of the story is in the economy and the recession now upon us. On this, yesterday's package is likely to have only a limited effect.