"If bankers do not start lending of their own accord, governments will force them to."

I was not happy with TARP, once transformed from buying toxic assets, being sold as a credit stimulus plan, and then turning out not to be one. But I never believed that so many people in so many countries would be going through the same thing and feeling the same way. Once having received the money, the banks should be expected to lend. Willem Buiter wants to penalize banks if they don't, and the FT isn't too happy about this problem either:

"Bankers must start lending – or else

Published: November 21 2008 20:00 | Last updated: November 21 2008 20:00

“Neither a borrower nor a lender be” was not intended as advice for bankers. Someone should tell them. The purpose of the recent round of recapitalisations was to strengthen banks so that they could continue lending during a global downturn. But banks are not doing so. They must. They are vital utilities – a modern economy cannot function without credit. If bankers do not start lending of their own accord, governments will force them to.

Banks around the world have been recapitalised. Governments bought shares in them, increasing the banks’ risk-capital buffers. The banks were injected with enough capital not only to make up for the losses they were expected to make in the downturn, but also to allow them to expand their lending without the capital cushion becoming too small relative to the banks’ assets. Newly fortified, banks were supposed to become trustworthy borrowers and confident lenders."

This is my point about TARP being a credit stimulus plan. Only we're talking about Britain, as well. It's like a virus.

"Expecting further losses, however, they have clammed up. They are wary of extending their balance sheets further. This is, in part, because they are still traumatised after a near-death experience. Many banks have also seen their top management decapitated. Finally, investors and banks have become so risk-averse that even government guarantees on lending are not convincing. Despite being underwritten by the US government, perceptions of the risk on Citigroup’s debts have remained stubbornly high".

As Peston showed, this hoarding strategy, cleaning up your books, waiting for sentiment to turn, makes sense from the point of view of the banks. However, they were given the money to lend it. So, as Peston says, there's a conflict. But I predicted this from the first. The banks will lobby and do what they feel they need to in a hybrid plan. That's a major reason that they don't work and cost so much. There's an inherent tension between the banks and the interests of the taxpayers. That's why I favored the Swedish Plan. It wasn't because I wanted the government running banks. But, please, Political Economy is having the knowledge and sense to understand how the real world is functioning. This tension was built in to TARP, and the other hybrids in other countries. I've just showed you Britain, so I'll try and document others.

"Governments can do more to support lending. They can reassure markets that capital ratios are supposed to fall in the downturn and that they stand behind the banks. Finance ministries around the world can recapitalise further. Central banks can expand their lender of last resort functions.

If evidence emerges that banks are not lending because they are hoarding cash to pay off the expensive preference shares taken by governments, the rescue can be restructured. One option would be to give governments more control of the banks; another would be to reduce the short-term costs of the capital.

But even if governments ensure that lenders are solvent and liquid, it could still be rational for each bank not to lend. Banks want safety in numbers when it comes to lending. But a lack of credit would force sound companies under because of a working capital squeeze. Faced with this prospect, governments will have no choice but to step in.

Politicians may attempt to lend directly, taking on credit risk to stimulate certain categories of lending and insurance. But banks, which have always been dependent on the largesse of taxpayers, could be forced to adopt central targets for new lending. This would overcome the problem of no institution wishing to be the first-mover. And banks would have little choice but to obey; if they are unco-operative, they could end up in public ownership."

So, governments can:

1) Explain to creditors that a bank's capital falls during a downturn ( Good luck )

2) Reassure that they stand behind the banks ( Good luck, if this just means jawboning )

3) Give capital to the banks if they need more. Hopefully this means after have loaned a bunch.

4) Make borrowing from Fed cheaper ( Aren't they doing that? )

5) Threaten them with being taken over ( I'm sure they're scared )

I say just take them over and be done with it. Then take them private ASAP.