BY nationalising Bradford & Bingley, the Government has effectively written a blank cheque to failing banks, with taxpayers picking up the bill. This demonstrates the full gravity of the Northern Rock decision. The Government now feels duty bound to stop banks from collapsing, no matter what the cost.
The economic consequences could be dire. The Treasury unwisely entered the current slowdown with a large budget deficit. Taking on extra billions of bad debt will send public finances further into the red.
Taxes are therefore likely to rise. There may also be upward pressure on interest rates as the Government borrows more on the money markets. These developments are likely to prolong the economic slowdown and delay the recovery of the banks. They could make further collapses more likely, heaping even larger burdens on taxpayers.
Then there are the problems that come with nationalisation. The 1960s and 1970s showed that government-owned enterprises become bloated and inefficient. Propped up by subsidies, they also damage private sector rivals through unfair competition. Such an outcome would be disastrous for the banking sector. If loan books are not well managed, then bad debts will multiply.
The free-market system i