The UK government announced yesterday and expanded on today a plan which will involve the partial nationalisation of the British banking system. Costing £400 billion (or around $692 billion) of public funds, the package is designed to inject extra capital into the financial system in return for a preference share in each of the banks, guaranteeing a return for the taxpayer. Perhaps unsurprisingly, the FTSE 100 dropped by 4% after the measures were announced.
The sums involved in Chancellor Alastair Darling's plans are massive. From today's Financial Times
: "£50bn to buy stakes in the banks, £250bn of guarantees for the inter-bank market; another £100bn in additional short-term liquidity from the Bank of England." The total figure dwarfs both spending on education (£82 billion) and health (£111 billion).
In addition to the shares, the government has demanded a radical change in the banking culture with increased regulation and restrictions on city bonuses.
A recapitalisation of the banking system, rather than an attempt to buy poison assets as the US government has been doing, is, in the words of Gordon Brown, designed to "put the British banking system on a sounder footing."
So, a stake (pun not intended) in the heart of the British free-market or, as the FT
says, "a prudent gamble"?