Why are we bankrolling the banks?

Gordon Brown arrives in Birmingham on Monday for the first Cabinet meeting outside London since Lloyd George took everyone off to Inverness in 1921.

Within 12 months, the Welsh goat was toast. That’s not a good omen for our dour Scottish Prime Minister as he surveys the wreckage of an economy which 12 months ago still seemed prosperous and going places.

An economic Hurricane Katrina has overwhelmed the feeble financial levees Mr Brown built during his years as Chancellor and we are now floundering around in the floodwaters.

But let’s be fair. The economic disasters of the past year are not Mr Brown’s fault. The biggest offenders of the lot are our common-or-garden High Street banks.

They paid themselves marvellous bonuses. They racked up stunning profits. They sold money as if it was going out of fashion – they flogged the stuff even to people who couldn’t afford to buy it.

There never was an ounce of sense in setting someone up with a mortgage when the house isn’t worth what they’re paying for it and they don’t have an income which will allow them to meet the debt.

That, though, is what the banks did. And let’s never forget where the responsibility for this really lies.

As the banks are now so suspicious they won’t even lend money to each other, they turn to the taxpayer – you and me – for hand-outs and support instead.

We must be mad to support them, especially as they won’t support us. They repossess houses, they whack up their various stealth charges, they call in loans to small businesses, they refuse to lend money.

The banks got us into this fine mess and they refuse to play any part in getting us out again. Instead, they think they can keep making fat profits and expect the taxpayer to take on their liabilities.

The credit crunch is not the only cause of our woes. Fuel prices have soared. Petrol, gas and electricity prices are now ridiculously high and will stay that way. Especially as we now seem unreasonably dependent on the Russians, which is asking for trouble.

Of course, Mr Brown and his Government could have done more to prepare for this crisis or even prevent it. The banks are supposed to be regulated.

Someone, somewhere, in our expensive Civil Service should have noticed that their lending policies had abandoned the “prudence” Mr Brown used to be so keen on and were completely bonkers.

Yet Chancellor Alistair Darling, in his rambling critique of life in Downing Street, admits the first he heard of the credit crunch was last summer when he read about it in the papers.

Finger? Pulse? What’s the point of the Treasury if it doesn’t even notice the economy is going rapidly up the creek until the man in charge has the leisure to flick through a few newspapers on his holidays?

Since Northern Rock’s slow nationalisation signalled the start of the recession, things have gone from bad to worse. Mr Brown doesn’t really know what to do.

If he’d kept taxes lower during the ten fat years, he might have something to spare for the thin years we’re now facing. But he spent everything he could lay his hands on, and more.

So at a time when the economy really does need the extra spending which tax cuts would make possible, there’s no money left.

The base interest rate isn’t terribly high, given that inflation is still rising. But we now have the unprecedented sight of the base rate being cut while the banks have the nerve to increase the cost of borrowing money from them.

Then we have the doomsters telling us house prices have fallen ten per cent and calling on the Government to do something about it.

Actually, though, that drop is pretty modest when you remember that last summer’s house prices were far too high, fuelled by the banks’ ridiculous credit splurge.

There was so much money available that house-buyers were able to take out mortgages for more than the price of their house and encouraged to take on loans of six times their annual income.

So if houses were madly over-priced last year, we should be pleased their cost has come down a little (though not enough).

If you bought at the top of the market and you’re hoping to sell today, then I’m sorry for you. You may well lose a lot of money.

You are in a minority, however. For most people, the best thing to do is nothing. Sit tight and wait. The housing slump will last a couple of years but it’s not for ever.

Gordon Brown, though, can’t seem to understand that everything has changed. Instead, he seems to want to recreate the good times by bankrolling the banks and stimulating the housing market all over again.

It’s difficult for a Prime Minister. People expect you to “take action”. In reality, you’re pretty powerless. And nobody in “power” will ever admit they are actually unable to make much of a difference.

The truth is that the economy will correct itself in due course. House prices will stop falling and start to recover. Banks will have to start lending again otherwise what’s the point of them?

Fuel prices have already peaked and started to fall. Meanwhile we’re all desperately searching for cheaper alternatives.

Mr Brown could make a difference. He could cut public spending and taxes. But he won’t do that.

He could control the banks properly – but that’s like shutting the stable door after the horse has bolted.

His best bet is to do nothing more than cross his fingers and hope for the best. But he won’t do that. So instead he will meddle in affairs he can’t control and doesn’t understand.

As a result, the recession will become more complicated and probably last longer than necessary. But at least our Prime Minister will be able to claim he is taking decisive action.

And as his main objective is no more than to survive in office for the whole of September, it may even work. But remember, it’s politics not economics.

Which, after all, is why he decided to hold a Cabinet meeting in Birmingham in the first place.