From the editor’s desk

Brown’s biggest gamble

What had seemed like a mere crisis in the banking system turned this week into something close to a calamity. The emergency rescue plan announced by Gordon Brown and Alistair Darling would have been close to unimaginable a matter of weeks ago. While it has long been the ambition of the Left in the Labour Party to nationalise the banks, not even Tony Benn could have imagined that it might be partly achieved by these means. And despite this dramatic action and further moves by the Bank of England, there is no certainty that the financial system will recover swiftly. These are, as both the Prime Minister and the Chancellor asserted, extraordinary times.

They also have to represent the end of an era in banking. In principle, the notion of the taxpayer shoring up institutions that have paid themselves too well and loaned money too recklessly is profoundly unattractive. In practice, the economy could scarcely withstand the collapse of the banking system without massive consequences for the ordinary citizen. Not that the rescue package isn't without its own set of consequences, coming as it does on the back of a couple of years when the Government has been shelling out more than it was getting in as taxes. With the public purse already bearing the cost of Northern Rock's nationalisation, things are going to get worse before they get better as banks tap into the Treasury's coffers, so many schemes that involve increased public spending are unlikely to see the light of day within the next few years. Still the Government found itself with little choice but to intervene and having made that decision it at least produced a proposal that is comprehensive in character. The broader acceptability of this bargain to the taxpayer will depend on whether the "strings attached" by Ministers are deemed to be credible.

This means that the implicit promises in this deal are honoured. It would be obscene if British banks were taking support from the taxpayer while foreclosing on the mortgages and the small business accounts of those self-same taxpayers. When (and it is now a "when", not an "if") unemployment starts to rise sharply, the banks must demonstrate they are sound social citizens. The vulture ethos of the past must not be repeated, and it would be completely unacceptable for senior figures in banking to pile bonus upon bonus on top of already substantial salaries while relying on the Treasury to put a floor under share prices. It would be bizarre if massive dividends were offered to shareholders when many banks will only remain viable because of this exceptional act of intervention.

The longer-term question, however, remains cultural. In the past two decades the banking system has shifted from relatively straightforward transactions and cautious assumptions into ever more esoteric financial instruments with a blasé attitude towards risk. It was bad enough that the likes of the investment banks engaged in such activity. It is far worse that high-street banks, dependent on deposits from ordinary people, could not restrain themselves either. Once this turmoil is over, Ministers will want to turn their attention to legislation and regulation as it relates to banking. What has been seen in the past week is Mr Brown's biggest gamble. It is not only our money but his reputation that is on the line. That the fate of a Labour Government and the banking system should be so interconnected is quite astonishing. It is true all the same.