Why, why, has the botch of the Dunfermline cost the taxpayer a potential £1.5bn?

The chancellor Alistair Darling today said that the stricken building society would have needed between £60m and £100m to stay afloat. So why, we should be compelled to ask, didn’t we allow it to have it?

Access to the much trumpeted liquidity scheme, says Darling, wouldn’t have been enough to ensure its depositors’ money was safe.

A  building society such as this had a lot in common with the small businesses now under such pressure as the downturn takes hold and the government bashes the self-employed with an above inflation hike in business rates and national insurance contribution.

The reason that most small businesses fold is not due to a hole in their assets, but in their cash flow. They often have plenty of money coming in, but cannot access it quickly enough.

The treasury’s liquidity scheme was surely implemented for exactly this occasion when an institution, with a loan book now saddled in Threadneedle Street, needed short-term funding.

Give it the £100m it needs – that’s pittance compared to recent bank bailouts – and let it get on with it. If it needs more at a later date, then give it some!

Instead of either a privately run building society flushing toxic loans from its system independently or having a nationalised bank that can act as a direct central money lender, we have neither. Darling has lumped us with a pseudo-autonomous halfway house. And they simply don’t work.

The government seems intent of valuing competition of the markets above prudence. It doesn’t make sense, politically or economically, to give the taxpayer all a bank’s liabilities while Nationwide gets all its assets.

Has it learned nothing since the Northern Rock debacle? It may think it has acted decisively, but the government has smudged another issue proving, if proof was needed, that it is losing its grip on this financial crisis.

So the government acted slowly and the treasury foolishly with its bungled nationalisation of Northern Wreck. You’ll forgive me if I refrain from gasping and holding my cheeks in disbelief.

It has been always painfully obvious that this is the case – and it is becoming more painful with every passing day, particularly for those poor mortgage holders who were enticed by the supposed competitiveness and security of a state run institution.

That a government run bank was still offering 125 per cent mortgages as recently as last Spring is awful, but hardly surprising. We know that at the time Brown was imploring banks to “return to 2007 levels of lending”. Chief exec Gordon clearly still believes that in order for people to keep afloat, they need to be in debt.

Even as the housing bubble was popping, the government instantly – and knowingly - put thousands of households in negative equity.  

Why? Conservative MP Edward Leigh yesterday asked a similar question:

Why didn’t the Treasury demand an immediate stop to the reckless lending that got the bank into trouble in the first place?

Gordon Brown and his treasury cronies might be accurate when they bang on about savers not losing a penny of the money in their accounts, as they successfully averted a full-scale banking collapse.

But what of those people who have lost their homes, on the government’s watch? What of pension losers? (There are many.)

The government has essentially lent to families before turfing them out of their home. All we can do in response is to turf Gordon Brown out of his.

Tomorrow the MPC will announce that Alastair Darling has given permission to the governor of the Bank of England, Mervyn King to begin quantitative easing. The Bank’s purchase of government gilts and assets is designed to increase liquidity and, ultimately, increase lending.

Firstly, this wont work. The only thing printing money is likely to achieve is an immediate devaluation of the currency and, with no significant exporting sector, is unlikely to act as a fiscal stimulus. But more on that tomorrow.

For tonight, let’s look at the three options available to the MPC re: interest rates.

1. 0.5 per cent cut

Expected by almost everyone. In spite of David Blanchflower’s assertion that the “transition mechanism of monetary policy is broken” the Bank is likely to continue easing central credit conditions in a bid to encourage lending.

Why is the transition mechanism broke? Because banks need to make money, so they won’t ease debtors’ conditions further than between 2 and 3 percent. Anything less – such as the likely central rate of 0.5 per cent – just wont be considered. Interest rates for savers could plunge further, making seem very much like the BoE is punishing the prudent. That’s because they are.

2. Hold at 1 per cent

This is wanted by more or less everyone. It makes sense. Gordon Brown and his treasury is only exerting pressure on the MPC for further cuts in order to be seen to be doing something.He can then characterize the Tories as a “do nothing” opposition.

The Building Socities Association, the body who looks after British savers, is pleading against further cuts. They will devastate pensioners and benefit debtors in no way. At least not in the short term.

3. Go all the way down to zero per cent

Unlikely on two counts. First, it leaves the Bank with virtually no monetary room for maneuver. Secondly, precedent suggests that there’s little difference between 1 and 2 per cent – the LIBOR will still stay significantly higher than zero – otherwise why would any bank lend anything?

Much has been said about funds not wanting to borrow money (over night, over three months etc.) due to punitively high interest. If that switches and goes too low, funds and banks wont want to lend. This would provide the polar opposite effect of what the Bank and MPC claim to be after.

But, if we’ve learned anything from this crisis, it’s to expect the unexpected.

After the Second World War, Prime Minister Attlee inherited a country on the verge of bankruptcy. The war had ravaged the nation’s finances and it wouldn’t be long before America decided they didn’t trust Britain to pay back the money we had borrowed.

Attlee, invoking measures proposed by the economist John Maynard Keynes, sought to secure employment through increasing the public sector. By 1951, 20 per cent of the British economy had been taken into public ownership.

On Friday, shares in Lloyds slumped 35 per cent after the announcement that its HBOS bride had lost £10bn last year.The shotgun wedding of the banks seems now to have been overly salacious; many senior government officials are now having wedding night nerves. Titters of HBOS’ nationalisation are spreading.

The Liberal Democrat spokesman, Vince Cable, spoke of his concerns that “we’re getting into nationalisation accidentally”. This is unlikely to be the case.

Labour has gone so far as to nationalise two high street banks already, along with pumping billions of taxpayers money into the investment banking sector. Add this to the VAT debacle, and a promise to guarantee any deposits up to £50,000 and a picture begins to emerge. It is an essentially political one.

As Gordon Brown wishes to categorise the Tories as a ‘do nothing party’, he positions himself as a ‘do everything PM’. Labour is drifting closer to its socialist roots as it contemplates taking yet another bank into public ownership. This is perhaps no bad thing.

Just as Keynes once suggested, only half-jokingly, that people could be paid to dig holes and them refill them, so Brown would rather compliment David Cameron than see another Briton go without work. Brown is using this crisis to drag his Labour party to the left of the one he helped create under Blair. Should Brown stick to his ideologies, an already burgeoning public sector could well swell further.

The next election will be focused on the economy, and the news will not be flattering for the incumbents. Brown is already laying the foundations for a newly socialist party, knowing full well he will be hammered over Britain’s finances.

Few people would have taken a greater sense of schadenfreude out of watching four top bankers squirm in front of today’s Treasury select committee than me.

I have, in my fledgling career, been rendered frequently aghast at some of these so-called ‘masters of the universe’ and their overpowering scent of manly hubris.

Sir Fred ‘The Shred’ Goodwin, Sir Tom McKillop (RBS), Andy Hornby and Lord Stevenson had combined annual salaries of £7.5m yet their apparent mismanagement and aggressive expansionism cost the British taxpayer £37bn in the same time.

Goodwin, who many blamed for the spectacular fall in RBS shares after his pig-headed takeover of Dutch bank ABN AMRO, got £2.9m in bonuses in 2007. No wonder this is emotive stuff and I would forgive anyone who watched today’s proceedings with clenched teeth.

But being hot headed and following emotions, hunches and gut feelings is what got us into this mess. So let us think for a moment, free from bloodthirstiness.

Bankers need their bonuses. They do for several reasons.

We as taxpayers have lent huge amounts of capital to our stricken institutions, and we’d like it back, thank you very much. So it’s in all of our interests for the banks to be profitable. Given that a bank’s raison d’etre is to balance its assets and liabilities, anything that comes in as a yearly surplus should be rendered in dividends for shareholders and bonuses for employees.

Please note: balance sheets need to be fully, even pessimistically accurate to avoid vast write-downs and losses – as we have seen this year.

Banks need capital to continue trading, and lending. We’d all rather they raise it privately, wouldn’t we? Share and rights issues are offered on the basis of projected profits; they are priced to a market that expects a return on investment. So if we start limiting bonuses – or scrapping them all together – we run the risk of no one wanting their shares, leading to, well – you get the point.

This is not to say that bonuses are entirely deserved. I agree completely with Brown and Cameron’s anger, real or supposed, at the way investment banking has been operated. The problems were not essentially the exorbitant bonuses received by bankers, but the fact that the money paid out in them wasn’t really there. They were eating into working capital bases, not profit.

Bankers should get their bonuses, but only as a reward for a bank being truly profitable. Oh, and when they get them, they might want to keep quiet about it.

Today some very naughty bank bosses have been receiving a royal roasting from a group of MPs.

Disgraced bosses of RBS and HBOS have finally been brought publicly to book and yes, they did manage to muster S-word. Here’s how it’s been reported:

The Guardian’s Dan Roberts takes more than a little pleasure in seeing Andy Hornby squirm.

Hornby really looks like he might starting crying. This is quite painful to watch.

Sam Coates in the Times saw little sincerity in the bosses’ eerily well-prepared spiel. He reckons they’re just after the sound byte on the evening news.

So the sorries were fulsome, well-rehearsed and gave the appearance of being unconditional. It wasn’t their first apology, they all added casually, because they had already apologised (in private) to shareholders.

The Telegraph’s Tracy Corrigan disagrees, arguing that the apologies themselves seemed genuine, but that they fail to be truly representative of the failures of other bankers. There is a consensus of scapegoating here.

Saying sorry doesn’t make it all OK, of course. But neither should we assume that only those who have apologised have anything to be sorry for.

Danny Brierley, in The Mail, writes how a set of senior bankers are threatening legal action should new rules limiting the amount of bonuses big banks give out be implemented. As you can imagine, they love that.

Legal experts today warned that plans to stop bonuses may be a breach of bankers’ human rights.

The FT focuses on RBS’ outrageous acquisition of Dutch Bank ABM AMRO for a £10bn layout just as the credit crunch was biting last year.

Sir Tom said: “Anything we paid… we overpaid. Everything we paid has not been worth it… we are sorry we bought ABN.”

Nicholas Paler on Citywire agrees that Hornby was getting rather more attention than his partners in crime. Or at least he looked like he was.

Hornby next, who is looking increasingly under the cosh. Questioned about the decision to merge HBOS with Lloyds TSB, Hornby says it was the best option available.

The BBC’s Robert Peston used to work in the city. So guess how he feels about bonuses… He makes a very good point about the importance of bonuses in managing share expectations and employee performance.

John Varley, Barclays’ chief executive, told me it was right and proper that he shouldn’t receive a mega-bonus – but that surely it would be wrong for him to deprive mortgage advisers and branch staff of a few thousand pounds if they hit their targets.

Whisper it quietly. Shout it from the rooftops. It’s finally here. The word that has been written, reported, blogged and tweeted countless thousands of times since last September finally gains credence. The UK is officially in recession.

It’s perhaps not the most compelling or unexpected of news stories but it does lend some perspective to what the Tories are labelling, only half-unfairly, Gordon Brown’s Recession.

That an article of such economically cataclysmic content is treated as old news is news enough in itself.

We have just experienced our worst quarter since the depth of the last recession – the word’s usage has apparently increase 2000 fold recently – in 1990.

History is a guide to navigation in perilous times.

- Pulitzer Prize winner David McCullough

The natural tendency once something of this magnitude has been confirmed is to seek solace in history. Previous events set precedents that can cajole us into believing that, although we are in awful shape, we are not in that scariest of positions – uncharted territory.

We hear that the pound is at its weakest against the dollar for 23 years. Unemployment is encroaching on levels not seen for 15. Economic growth is the slowest in 27.

Yet we are are in unprecedented financial times in many ways. The Bank of England’s base rate has never been lower. Media reporting of job losses and instantaneity of market transactions have never been quicker nor, lamentably, more prone to error.

History cannot console us. Look back and comparable figures show that the last time Britain’s economy shrank by 1.5 per cent, we were still in the mire. The oil shocks of the Seventies were still rippling and inflation soared to levels not seen since – you get the idea.

Analysts understandably look to history in order to predict a recessions course. But all they provide us with are a set of rules that apply to different times. No recession is identical and no country has exactly similar problems. In this recession alone we have had ‘worst since 1990′, ‘worst since 1980′, ‘worst since 1929′ etc. Will we have the worst ever?

I wouldn’t bet against it, just as I wouldn’t advise anyone to attempt further predictions based on historical premise.

One modicum of solace can be taken from history, in the Nineties recession, to be exact. On the morning of 22 November, 1990 Prime Minister Margaret Thatcher, after over seeing a meteoric boom in unregulated financial growth followed by crippling bust, resigned from office. Are you listening Mr Brown?

Lord ‘of the Underworld’ Mandelson is expected to unveil new plans tomorrow outlining the government’s commitment to help small businesses through the recession. The £20bn scheme will increase the percentage of small business loans backed by the treasury from 75 to 95 percent.

This sounds like a good idea. Restore the confidence banks have in small business transactions by insuring they will see almost all of their money returned, even if a company goes under. How can the banks lose?

The Federation of Small Businesses even likes the scheme. In principle. But they seem more pragmatic than ministers. They can see the motivation behind such a scheme or, rather, the lack of it.

Stephen Alambritis, of the FSB: “Banks don’t like to process government ideas. The small-firm loan guarantee scheme took between five and ten years to gain traction. This is the last throw of the dice.”

As the sluggish reception of successive interest rate cuts shows, what the government wants is not the same as what the banks want. Banks’ confidence has been shattered by a quick shock of defaulted mortgages and business insolvency. Big high-street chains are dying.

The government’s plan threatens yet again to secure the imprudent. If there is anything positive to take from recession, it is the ability of good, frugally-managed businesses coming through stronger than before. Those with successful  and sustainable business models will survive.This plan seeks to help those taking big risks with borrowed money. Inevitable failure will only further shake lender confidence.

If a business is financially nonviable, why guarantee it? That will only charge the taxpayer for company mismanagement.

If a business is robust and sustainable, why guarantee it? Borrowing within its means should ensure a company’s future without the need for central back-up.

The government is slowly realising that banks do not look after the interests of their customers – they look after profit margins. There is little compulsion to partake in a central scheme that will likely force lending with stringent conditions.

Labour’s matchmaking service for banks and businesses needs much work.

Congratulations to a gushing Kate Winslet. Congratulations too, to those who worked on Slumdog Millionaire, the film that last night won five awards at the 66th annual Golden Globe Awards.

Based (loosely) on Vikas Swarup’s novel, Q & A, about a Mumbai chai boy winning the Indian equivalent of Who Wants to be a Millionaire? It’s a game show that the producers hope will never be won for one reason: they don’t own the jackpot.

Well-educated doctors and lawyers rarely get past the 60,000 rupees round, so imagine the public’s surprise and joy at a slum-dweller bagging the billion grand prize.

Slumdog Millionaire is an important film for these times for a few reasons. First are the parallels we can draw between the financial management of the game show’s organisers and investment bankers, hedge fund managers and Bernie Madoff.

All have been subsequently reviled for being perfectly happy in betting long and hoping that they will never lose; assuming an elaborately packaged web of debt would never catch up with them.

Slumdog Millionaire marks another significant step forward by Indian movies  in Western film industries.

The film’s most important facet in a recession is its rites-of-passage plot focusing on social mobility. A lower caste individual climbs the financial and social ladder, demonstrating such a possibility to the countless millions starting in his position.

The last decade of prosperity has seen an increase in wealth disparity as the rich, taking risks with money they already have, get richer and the poor stay the same. Such a failure by a Brown-financed Labour government has led the PM to draft in arch-Blairite Alan Milburn to get British social mobility moving again.

The number of entrepreneurs increases during recessions. Resourceful individuals see gaps in a market in the first throws of re-finding its feet and act decisively. If they are are suitably financed in the short-term (this is a big if) they can emerge richer from slumps.

Another reason people move up the wealth ladder during recessions is that they recognise what goods and services consumers need, not necessarily what they want. Recession tightens the belt and focuses the mind.

One can only hope the banks allow the next generation of entrepreneurs the finance to kick-start their dreams, and our economy.

In the past few hours, the US Federal Reserve – the body in control of more money than any other on the face of the earth – has announced base interest rates of “between zero and 0.25 per cent“. This is not only unprecedented: this was, until recent weeks, utterly unthinkable.

Think for one moment what this means. If a bank borrows $1m, it will have to pay back, at most, $1,002,500 over the period of the loan. This is free money.

The aggressive action from Ben Bernanke and co comes two weeks after the Bank of England cut its base rate of lending to an all time low of 2 per cent. And still people are calling for more.

Interest rate cuts are resorted to when an economy is threatened with deflation. A source working in the currency market reckons that even such cheap money will not stimulate the economy in the short-term. Customers, both retail and wholesale, simply cannot afford any more debt.

“Interest rates are better in punitive terms, for choking off inflation. They’re less effective at producing inflation from thin air,” he said.

There is a further problem. If, by some fluke or miracle, Gordon Brown actually manages to borrow Britain out of a deep and prolonged recession, and the economy starts to recover, what’s going to happen to the pound with such unsustainably low rates of interest?

David B. Smith from the Institute for Economic Affairs, said: “The danger is now we are getting into over-steering territory. Extreme interest movements risk destabilising the economy.” He’d probably know a thing or two.

Concerted and co-ordinated rate cuts are a deliberately decisive attempt to stimulate economic growth by making bank lending and inter-bank lending enticingly cheap. What is the best case scenario, should this manage to magic up confidence?

The liquidity returns to an over leveraged market – a market now with increased levels of liability from these goliath lenders of last resort. This would, in turn, eventually lead to banks ceasing lending once again as currency spirals, unencumbered by interest rates. It wouldn’t be pretty.

With such a slashing of rates, the Fed has also driven itself to the end of the road. There is nowhere left for US rates to go, no space in which to react to the effects of monetary movements, such as, I don’t know, interest rate cuts.

So will Mr. Bernanke’s all-on-red gamble work? Probably, and hopefully, not.