Welcome to Momentous Monday. On this side of the Atlantic there are developments of historic importance which are already making their way across the pond to you. The British people woke up this morning to discover that they are now the proud owners or largest shareholders in some of the world’s biggest banks. The taxpayer is injecting around $75 billion into three banks – Royal Bank of Scotland, HBOS and Lloyds TSB – and that’s probably just for starters.
This morning we can breathe a little easier, whatever the long-term downside to state ownership might be.
I never thought I’d write this but, as someone with substantial deposits in the Royal Bank of Scotland, I’m relieved the government has taken it over. In the current financial crisis even an institution as big and powerful as the Royal Bank was in jeopardy. This morning we can breathe a little easier, whatever the long-term downside to state ownership might be. The stock market seems to agree. As I write the London market is up 170 points. London, not New York or Washington, has become the new laboratory in this financial crisis. The Paulson plan, as this Daily Beast blog predicted last week, is dead on arrival, despite all the political capital the Bush administration spent on getting it through the US Congress. All eyes are now on what Prime Minister Gordon Brown is doing in London – and every major financial centre, from Paris to Frankfurt and, yes, even Washington/New York is preparing to copy him. Eurozone governments are today drawing up their plans to inject taxpayers’ capital into French, German, Italian and other European banks; and, as Mr Brown has done in London, to guarantee lending between banks. After treading water in the wake of Washington and the Paulson plan, London and the European Union are now setting the pace. Expect Washington to follow suit before the week is out.
The US Federal Reserve was working through the night and this morning, before the European markets opened, issued a statement promising to make as many dollars available as the global banking system required, ensuring liquidity. The Bank of England, the European Central Bank and the Swiss National Bank agreed to do the same, with the Bank of Japan probably about to join them. The degree of international cooperation in this crisis is now quite remarkable and underlines the scale of the threat. But all eyes are now on Washington. Officials there assure me that Treasury Secretary Paulson is now looking kindly on the Feds guaranteeing inter-bank lending in America, essential if banks are to lend to each other again. They also don’t rule out the partial nationalisation of American banks if that’s what it takes to recapitalise their balance sheets. Truly, we are moving into unprecedented and uncharted waters. The US government is already playing a seminal role behind the scenes in helping Morgan Stanley salvage its $9 billion investment in Japan’s Mitsubishi Bank. But that is just the start: a right-wing Republican administration is about to insert the state into the US banking system to extent unheard of since FDR and the New Deal. The prospect of financial disaster has buried long-held ideological beliefs. The head of the International Monetary Fund said in Washington at the weekend that the global economy faced “meltdown”. That kinda concentrates the mind: whether you’re on the left or the right, survival outpunches ideology, which is why a Republican government in Washington, a Labour government in London and a Gaullist regime in Paris are increasingly singing from the same songsheet.