FUNDING OF FISCAL RESPONSES TO THE CRISIS

Solving the combination of credit & economic cycle recessions together amounts to doubling of our recent past experience of economic recessions. The solution has to be about restoring confidence as much as about restoring solvency. Trying to do just enough to win through may be foolish risk-taking. We can see this to be more like a war-economy situation where the only sensible risk-taking is to do as much as can be done and therefore much more than enough to win through.
Just as in wartime, it is essential that when trust in all else fails we do not lose trust in democratic governments too! There are far worse consequences than trusting in government, however flawed their efforts might be. It is my considered view, however, that remarkably our governments are doing a surprisingly intelligent and good job. Any of you luxuriating in angst and anger who wish to strike blows in all directions - you're being dangerously wrong-headed!
I task you with the quesion: what is the importance of not losing trust in what governments are doing and can do? I suggest that when trust is lost in banks and so much else, we have to be able to trust in government actions in this crisis for fear of far worse consequences when all trust is lost! In this respect is it not unlike wartime conditions where however flawed the Churchillian or FDR leaderships might have been, for example, they pulled together the national effort? While I don't want to make a party-political point, this is where the UK Conservative front benchers are mistaken in playing yah-boo politics. Would Labour Party have done the same in WW2 had it not been part of a National Unity government? I don't think so? But, it is undoubtedly with such thoughts that Obama is trying in the US to "reach across the aisle".
Overwhelming much else, more and more, is the immensely dramatic change to the pattern of world trade and financial flows, and this is also why Governments need to over-shoot in their measures. We could say we (Governments, and banks too) need to attempt a 'shock recovery', almost shoot first, ask questions later. And that means forcefully countering those who either emotionally or for carpet-bagger vested interest reasons oppose trying to restore as much as possible the map of how matters stood before the crisis. We can assess how much and where we can risk a clean break with the immediate past? In solving the banks liquidity risks, Governments can supplant as counterparty (and then as market intermediary) all of interbank wholesale funding of banks 'funding gaps' and also eventually bring credit and money markets on-market into regulated transparent credit and money markets. Part of the problem undoubtedlky was that these were off-mnarket, in 'over-the-counter' trading. This is not beyond governments financial resource to do so and would leave the previous sources of wholesale funding begging to get back into this profitable market - a good result for restoring balance to money and credit markets.
But, it cannot be accomplished if governments liquidity and SLS type measures are not transparent (e.g. The UK 2009 Banking Bill that permits non-disclosure for at least 6 months of precise details of government funding of the banks).
A related matter is that even the FT as well as all other media have failed to pick up that by law government holdings of commercial banks when over 50% are outside of regulatory supervision laws (CRD Basel II, Solvency II, IFRS etc.) and outside of the Companies Act and codes of conduct etc. This is clearly established at EU law by the Irish nationalisation of Anglo-Irish Bank and now applies to NR, B&B and RBS. (And similar is true of Fortis, ABN AMRO, and in USA of AIG, FM&FM etc.) Some assurances are needed here that regulatory supervision will continue in these cases!
Above all, the public want the reassurance of a clear statement of the game-plan. It is not enough that this game-plan is now diverted into the G7 and G20 agendas.
In my analysis of what's happening is as follows: banks generally in both UK and USA, and elsewhere, are losing twice their reserve capital, once to the credit crunch, once to the recession. Governments are replacing one times capital reserves and so far one quarter to one third of 'funding gaps' plus guarantees of deposits & bondholders. Banks have to recover one times capital reserve from recoveries and one times capital reserves from selling off business assets from which they can redeem government bank share investments (and will be anxious to do so before their share values rise sharply sometime in the medium term).
But, where are government measures in this to assure that banks will not endanger recovery by deleveraging, acting powerfully pro-cyclically? That, I believe, is to be found in the now long-run (not temporary) liquidity funding by central banks of banks 'funding gaps' - the reason why securitisation of bank assets has gone up dramatically in 2008 and will continue to be historically high in 2009!
This, so as to pledge the bond collateral with central banks as 40-50 year maturity paper (as in the UK, where this collateral after 25% discounting is pledged for 3 years holding periods in exchange for Treasury Bills, but this is likely to be prolonged beyond 3 years, and 3 years is now the US holding period too, up from 1 year) i.e. these are very long term Covered Bond, MTN and SIV funding programs under which the underlying loans are topped-up continually, replenished, rolled over. On this basis lending levels by the banks should be restored and maintainable.
In fact, we can envisage that insofar as all this government liquidity infusion is off-budget, the dividend & coupon revenues to Government are of sufficient size to balance US Federal and UK General Government budget deficits after 2009! Thus, there is a shift from private financial sector profit to Government profit to pay for the fiscal impulses.
If this framework is publicly recognised and managed intelligently that is a prudential way out of the mess.