"The line between private sector and public sector, which became blurred in 2008, may become almost impossible to see in 2009."

Peston sums the situation up, as per usual on BBC:

"The past 18 months was a story about the collapse of lending to banks and by banks - and about how we as taxpayers came to the rescue by providing £600bn of loans, guarantees and capital to the banks, to keep them afloat.( WE WERE ALWAYS ON THE HOOK WITH A SYSTEM OF IMPLICIT AND EXPLICIT GOVERNMENT GUARANTEES TO INTERVENE IN A CRISIS )

The story of the next year will be about the implications of this continued shrinkage in the availability of credit and about the implications of this massive, unprecedented support given to banks by taxpayers( LET'S NOT DO IT AGAIN ).

As a nation, our fortunes in 2009 will be conspicuously tied to the fortunes of our banks as never before. ( I'M NOT SURE I FEEL COMFORTABLE WITH THAT, GIVEN THEIR RECENT PERFORMANCE )

First, an economic recovery rests on the ability of banks to support viable businesses during what increasingly looks like a severe recession. ( TRUE )

Second, and as important, the balance sheet of the British public sector can be seen as the aggregated balance sheet of some substantial banks - because the state now controls three banks, Northern Rock, Bradford & Bingley and Royal Bank of Scotland, and will have a huge stake in a soon-to-be created fourth, LloydsTSB/HBOS. ( TRUE )

It means that if the perceived credit-worthiness of our banks - with their trillions of pounds of assets and liabilities - were to deteriorate further, that would have an impact on the perceived credit-worthiness of the state( YES ).

As never before, it matters to all of us that the banks run themselves in a prudent way( HEAR HEAR ). In an extreme and highly unlikely case, if the markets viewed our banks as recklessly managed basket-cases, that would have an impact on the value of sterling and on the ability of the government itself to borrow( TRUE ).

So our prospects and welfare depend to a huge extent on an institution that was created a few weeks ago by the Treasury to manage its investments in the banks, UK Financial Investments (UKFI). ( GOOD LUCK BRITS )

It's probably no exaggeration to say that - for the coming year or two at least - UKFI will be as important to all of us as the Treasury, or the Bank of England or the City watchdog, the Financial Services Authority.

UKFI's primary aim is to "protect and create value for the taxpayer as shareholder"( I AGREE WITH THIS POLICY ) - while also making sure that the banks we own provide "competitively priced" loans to small businesses and homeowners "at 2007 levels"( TRUE ).

Those objectives are not quite irreconcilable( IN THE US THEY ARE ) - in that the banks over which it has sway should be capable of providing substantial credit to the housing and small-company markets without chucking good money after bad, even though this is a dire period of economic contraction and proliferating bankruptcies( I AGREE ).

But, for the avoidance of doubt, UKFI has no ability to increase the supply of credit in the economy as a whole.

Remember that the ability of banks to lend is anyway being undermined by losses on the stupid loans they made in the boom years and also by the collapse in the price of houses, property and shares, which slashes the value of vital collateral that backs loans( VERY TRUE ).

So many banks are lending less to big companies, they are lending less for commercial property transactions, they are lending less to City institutions, they are lending less in the form of unsecured personal loans( TRUE. IT MAKES SENSE. ).

Lots of overseas institutions are cutting back significantly on the bounteous credit they provided directly to the real economy in the UK during the preceding few years( TRUE ).

Also many bigger companies that borrow directly on wholesale markets by selling bonds and other securities are finding it much harder and more expensive to raise money( VERY TRUE. A BIG PROBLEM ).

And credit provided between companies that buy and sell to each other is being massively restricted, by a collapse in the availability of insurance for such credit( TRUE ).

All of which can be summed up as "ouch" for businesses and households - and is the primary reason why some companies are going bust, and why those that will survive are reducing investment and cutting jobs( I WOULD ADD FEAR AND AVERSION TO RISK, SINCE THE "OUCH" SEEMS TO BE UTTERED IN TOO HIGH A VOICE ).

So even with £600bn and rising of support for banks from taxpayers, our banks simply don't have the resources to keep afloat real companies - manufacturers, exporters - that are vital to the future of the British economy( SOME WILL FAIL ).

Which is why early in the new year, the Treasury will announce details of yet more taxpayer lending, this time to ensure that credit is provided to viable and strategically important companies - such as the more efficient carmakers( THAT'S ABOUT IT. JOBS.)

The line between private sector and public sector, which became blurred in 2008, may become almost impossible to see in 2009."

I disagree. We both have Hybrid Systems, in which the public and private commingle. All that's changed is the mix of the mingling, so to speak.

"who has admitted that interest rates are only a "blunt instrument" with which to control the economy."

A banker speaks. From the Guardian:

• Julia Kollewe
• guardian.co.uk, Monday 22 December 2008 11.29 GMT
• Article history

The Bank of England underestimated the severity of the current financial crisis, according to its deputy governor, who has admitted that interest rates are only a "blunt instrument" with which to control the economy( I AGREE WITH THIS, WHICH IS WHY OPPOSE ITS USE TO STOP BUBBLES ).

Sir John Gieve told the BBC's Panorama programme, to be screened tonight, that new tools were needed to complement interest rates. He also admitted that the Bank knew "crazy borrowing" was taking place and the price of houses and other assets was rising unsustainably, but did not fully understand the problem( IT SOUNDS LIKE THEY DID. WHAT WAS UNDERESTIMATED WAS THE SEVERITY OF THE CRISIS AND INEFFECTIVENESS OF GOVERNMENT INTERVENTION. I BELIEVE THAT HIS STATEMENT LENDS CREDENCE TO MY THESIS ).

"We didn't think it was going to be anything like as severe as it's turned out to be( BINGO! )," said Gieve, who is in charge of financial stability at the Bank. "Why didn't we see that it was so serious? I think that's because we, perhaps, we hadn't kept pace with the extent of globalisation. So the upswing here didn't involve the big increases in earnings and consumption and activity which we saw in previous booms. We saw the credit, we saw the house prices, but we did see a fairly stable pattern of earnings, prices and output."

Tim Besley, another member of the Bank's monetary policy committee, was quoted in the Daily Mail as saying there was "no quick or easy fix" to deal with the fall-out from the credit crunch and that measures other than monetary policy were needed( VERY TRUE ).

Sterling fell to a fresh record low against a trade-weighted basket of major currencies after the comments, hit by worries that British interest rates need to come down much further as recession bites( THEY WILL ). The euro climbed 1.5% to 94.72p, taking it close to its recent record high of 95.56p, which has led to the expectation that the two currencies will soon reach parity.

More powers needed

Explaining why the Bank did not raise interest rates to curb the lending and house price boom, Gieve said: "If we'd used interest rates to try and address this asset-price credit growth, we would have been holding down the level of activity elsewhere in the economy, in manufacturing, in other services, holding down the level of employment at a time when consumer price inflation and earnings were stable and reasonably low. And people would have said, you know, 'this is a wilful reduction in the prosperity of the country'."( WHAT HE JUST SAID IS WHAT I'VE BEEN SAYING )

The Bank could not rely only on interest rates to control the economy, Gieve argued. "One of the main lessons from this is that we need to develop some new instruments which sit somewhere between interest rates, which affect the whole economy and activity, and individual supervision and regulation of individual banks," he said. ( I AGREE )

"Maybe we need to develop something which bridges that gap and directly addresses the financial cycle and prevents the financial cycle and the credit cycle getting out of hand... I think we need to complement interest rates, which are a blunt instrument – you set one interest rate for the whole economy – with something which is more financial-sector specific."( I PREFER SUPERVISION OF THE INVESTMENT INSTRUMENTS, AND A STRICT FOLLOWING OF BAGEHOT'S PRINCIPLES )

Philip Shaw, chief economist at Investec, said the comments suggested that the "authorities recognise that more needs to be done to restrain borrowing booms because they are potentially destabilising." He noted that there had been numerous comments by Bank officials previously stating that interest rates could not be used to rein in borrowing because they were mainly designed to keep inflation on target.

Among the measures being considered by the government – to be adopted once the economy recovers – is a requirement for banks to hold more capital during good times( THIS MAKERS SENSE IF GOVERNMENT GUARANTEED ). Other measures could include legislation or guidelines on lending to households, Shaw said.( NO SPECIFICITY )

Gieve defended the Bank's performance in the crisis, which he called "a major storm we haven't seen the like of for 100 years". ( WE COULDN'T HAVE BEEN EXPECTED TO SEE IT COMING OR BEEN PREPARED TO DEAL WITH IT )

"It would be very surprising( SURPRISE ME ) if we weren't learning lessons from it and we are," he added.

Gieve also cast doubt( WAS REALISTIC ) on whether the Treasury would get all of the money back that it had poured into the banking sector, pointing to a "level of defaults" in the books of nationalised lenders Northern Rock and Bradford & Bingley, which were now held by the taxpayer.

Speaking on the same programme, John Varley, the chief executive of Barclays, predicted that consumers and businesses would struggle to get access to credit for the next one to two years."

There are some good points made here.