Faced with a $42 billion loss at RBS (RBS) and credit markets which appear to become more frozen as each day passes, the UK will move its economic rescue package beyond the banks into the system of private debt.
With corporations cut off from the oxygen of lending, they are slowing dying because they cannot improve their balance sheets in what would be the normal course of business.
At the front end of the process, the UK has essentially begun that nationalization of some banks. It will end up with a 70% share in RBS. The stunning part of the program is, according to Bloomberg, that the government will require aid recipients to sign “specific and quantified” agreements to lend, reflecting Brown’s frustration at the failure of an October rescue to unlock credit markets.
If banks want money, most of it will have to be loaned into the financial system. The Bank of England will further buttress the credit system by buying corporate loans and commercial paper.
It would not be at all unusual for a similar system to spread to the US as the $350 billion left in the TARP becomes available to the new Treasury Secretary.
Most economists believe that the Achilles Heel of the current US bank rescue plan is that it gets money into banks, but the capital does not come out the other end in the form of loans to businesses and individuals. Businesses cannot conduct their affairs in the normal course. The average citizen cannot get a home loan or expand his access to credit, even through it is his taxes present and future, which are the source of the bank bailout capital.
The UK has taken the step of essentially bypassing the banks to mainline money into the system. It is quick, and quickness is what is called for as the recession bites harder each day.
Douglas A. McIntyre
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