What to make of Brown and Darling’s £50 billion rescue plan for the banks? As with so much during this financial crisis, there’s a distinct air of uncertainty around it. There are potential upsides: it should help restore some degree of confidence in the banking system, help banks lend to each other, and stabilise the markets. But there are potential downsides as well, including:
1) Debt. The £50billion will be funded by increased national borrowing. And there could be more on top of that if HMT ever has to act on its promise to underwrite loans between the banks. As Fraser’s pointed out, the deficit is already daunting enough. This latest could make it hit the stratosphere.
2) Precedent. What happens when the £50 billion runs out? The pressure on the government to provide more funds will be immense, particularly if the biggest banks either didn’t take advantage of this first-time offer or remain in trouble despite it.
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