WHILE the French revolution brewed, Marie Antoinette`s courtiers squabbled over who should take precedence in her bedchamber. Likewise, as the world economy disintegrates, world leaders jostle outside the door of the Oval Office, eager to be first into the imperial presence.

To what end? Even Barack Obama`s Nobel-winning guru, Paul Krugman, on Monday despaired “We got into this mess and we`re still looking for an exit.”

Why not try the one policy as yet untried? Instead of pouring money into the banking system, use that money to reflate demand. How can a British Labour government ignore every lesson taught it by Keynes? How can policy remain dominated by one single maxim, that no bank should be allowed to fail and yet none should be properly nationalised?

When a very rich person tells a politician he needs help, the politician appears to quake at the knees. It was true of the erstwhile governor of the Bank of England, Montagu Norman, and his bankers before the Great Depression. It is true today of the impermeable membrane of bankers and ex-bankers clustered inside the UK premier`s office in Downing Street, London. Government aides in Britain are not trying to stave off recession. They are trying to save banks. Like chateau generals contemplating disaster on the Somme, they worry about the fate of their regiments rather than the war.

The banks are bankrupt. Their predicament was best illustrated in the Guardian in January with a chart assessing global indebtedness. It showed the notional value of “shadow” banking derivatives worldwide was $62tr. This was on top of a gross debt held by banks of $39tr. There is no way such sums, once they are at risk, can be covered by any amount of public spending. Yet western governments have already tipped $1.9tr into this black hole in the world`s finances.

Sooner or later these colossal sums must be written off, unless someone wants to print banknotes, Mugabe-style. The banking system must implode and revert to its essential and local retail base, storing money and lending against houses and business plans. The rest, for the time being, reverts to government.

There was a point at the start of the crisis when it still made sense to prop up an ailing bank to maintain confidence in its security and in the inter-bank lending on which that security relied. This was why the British bank, Northern Rock, was rescued in 2007.

When last summer Lehman Brothers was allowed to fail, the entire structure of confidence collapsed. Every bank`s long-term security was called into question. Insurance policies were activated and borrowing ceased.

From that moment banks were no longer part of an interlocking network of credit and liquidity. They ceased to be central pillars of the economy and became mere bankrupt businesses, scurrying around for money to pay their debts. Their sole claim on public aid was that they held deposits and mortgages, and were still in a position to lend.

Had the government seized them on day one, it could have secured those deposits and ring-fenced lending to businesses and individuals. This is what the Treasury did in a matter of days in 1939 at the start of the Second World War. At the same time it could have isolated so-called toxic debt, by statute if need be, into what amounted to “administration”. Above all it would have had control over the massive sums it was about to spend.

The £100bn of public money was supposedly for lending. It has not been lent. It is still not being lent. How dumb can ministers be? If you give a chronic gambler money, he does not pass it over to his wife for housekeeping, he gives it to his bookie.
— The Guardian, London