Gordon and the bank manager

Gordon Brown's upbringing in a Scottish manse is often referred to as defining his character. If this is so then the figure of the local town's bank manager must have been a big influence, perhaps a dark-suited man keeping a careful eye on the finances of local business and indulging in just one glass of sherry after work. A man one could trust and whose advice would be respected. Little else can explain his inexplicable, almost obsessive desire to look after British banks in their hour of need.
Although very complicated in its detail, the credit crunch is at its heart quite simple. Banks create money. They originally did this by issuing bank notes. Gordon would have been familiar in his youth with notes from such as the British Linen Bank and the Union Bank of Scotland, now part of the Royal Bank of Scotland, as Scottish banks, unlike English, still retain the right, closely controlled, to print money. Now banks mostly create money by lending more than they have cash on deposit, again a process fairly closely controlled. This is what Gordon's local bank manager did and, to an extent, still does.
All money is a debt and vice versa. Look closely at your English £5 note and it says in small print "I promise to pay the bearer on demand the sum of five pounds" signed by the Chief Cashier of the Bank of England. Starting with John Kendrick in 1694 down to the current holder, Andrew Bailey, all have signed banknotes promising to pay out if you claim your debt. Of course, today if you found your way in the Bank of England and demanded repayment they would presumably give you another £5 note or possibly five £1 coins. The debt that banks have to their depositors is the base which they use to create more money.
The key to the current crisis began in the 1990s when banks began to borrow from other banks, notably from foreign financial institutions, and then used these loans as the base from which to create more money in the form of loans to companies, as mortgages or to other financial institutions who then proceeded to create more money. It was this process that was almost entirely unregulated.
The money so created was quite specialised being mostly available for the purchase of various kinds of asset notably houses but also such specialised assets as Premier football clubs. So much money chasing these assets led to price-bubbles. These bubbles were finally pricked when one type of loan, sub-prime mortgages in the USA, started to fail though in truth it could have started in many other places. Once begun, the entire process of money creation went into reverse as loans were called in and could not be renewed. The credit-crunch is essentially a money shortage as stark as if all the bank-notes in circulation were piled up and burnt.
The British government response to this has been to provide some of the British banks with huge amounts of money essentially so they could restart the cycle of money creation. So far, £185 billion has been loaned to Lloyds, RBS and HBOS. Barclays and HSBC have also had money pumped in, the former from Abu Dhabi, the latter probably from China. The problem is that far from creating more loans, the money has largely been used to pay off the banks' own debts to other institutions as they fall due and cannot be renewed. The cost of paying back these loans, mostly in euros or dollars, has steadily risen as sterling has fallen.
The result is that, although the loans may have saved the banks from defaulting on their repayments, nothing has been done to stimulate domestic demand, the Keynesian recipe for combating recession. What is required is direct intervention, what is loosely called 'public works'. Yet despite vague promises, very little has actually happened. Indeed far from releasing funds for direct intervention, there has been a continuing squeeze on much public expenditure. Local councils, for example, are actually making staff redundant because of cuts in central funding. Perhaps most ludicrous of all, student grants are being cut by £200 million because demand has exceeded budget limits. It is difficult to imagine a better form of public expenditure in a recession than grants to encourage young people to spend some years training rather than go on the dole. But that is what is happening.
It does seem as if Gordon Brown's childhood vision of the bank manager has totally taken over government policy. Surrounded by appointed ministers and advisers from banking backgrounds, he can do nothing but give them more money whenever they ask for it. It is a sound recipe for disaster.