After all the hype, the economic rescue package announced by Peter Mandelson this morning already looks out-of-date. Even while he was speaking, there was another collapse in banking confidence which makes it hard to see how a few government loan guarantees are going to make up for the trillions of dollars of liquidity that has dried up around the world.
Many of the companies that are getting into trouble did not borrow too much; they just borrowed in the mistaken belief that they would always have access to future lending when they needed it. It is understandable therefore why the government is focusing on ways to make sure they can continue getting access to credit. The question is can it ever do enough this way to stop hundreds of otherwise healthy businesses from going to the wall.
Perhaps the time has come for a much more radical approach. Instead of subsidising banks to lend more money, perhaps it is time to move on from the past and forgive some of the existing loans.
There are already signs of this thinking in the banking sector with talk of creating a 'bad bank' to warehouse all of the toxic debt that has accumulated and allow the rest of the banking system to start lending to new customers again. But the bigger problem is the number of ordinary businesses that are being driven into bankruptcy because they can't meet their existing debt obligations.
Even the bankruptcy administrators are beginning to realise it is crazy to be pulling the plug on so many otherwise viable businesses and are talking about ways to encourage a stay of execution. The next step would be to force the banks to start writing off more bad debt rather than underestimating the scale of the problem in a desperate bid to prop up new lending. The Tories and other critics would no doubt warn of the moral hazard of treating debt as a disposable obligation, but it does at least chime with their concern that more lending is a perverse solution to the current crisis. It's time to forgive and forget.
