It was certainly true that the closing of the international wholesale money markets in August 2007 had cut off the flow of funds for some banks, notably RBS and HBOS. With these markets shut down, the banks were having difficulty rolling over their inter-bank borrowings and so were restricting new credit. However, the problem could have been tackled easily enough, either by loans (at a penalty rate) from the Bank of England or by state guarantees on inter-bank borrowing (with an appropriately high charge for the guarantee fee). A large body of precedent from earlier crises suggested that answers on these lines ought to be made available and would work. 

The package put together by UK officialdom did include guarantees on inter-bank borrowing. But that was only one element. The lending-determines-spending doctrine was so strongly and widely held that the authorities added a major qualification. The guarantees would be available only if banks had sufficient capital to continue lending during the downturn. Whereas two banks (RBS and Barclays) issued press releases saying they were not seeking extra capital, officialdom insisted that large amounts of new capital had to be raised. Further, if private shareholders would not cough up the money, the government would subscribe the money instead. Against the banks' protests that macroeconomic conditions were not too bad and a recovery could be envisaged in a few quarters, the Bank of England put together a planning scenario with a deep, long-lasting recession. This scenario implied that large amounts of extra bank capital had to be made obligatory.

In days (and often nights) of ferocious bargaining last October some of the world's largest financial organisations — some that have been household names in this country for decades, and had long been widely admired around the world for their efficiency and expertise — were bullied into raising capital that they themselves did not think was necessary. The British government brushed aside such niceties of market capitalism as shareholders' rights and management independence. The East Coast economists applauded Brown's effort. The Nobel Prize-winner, Paul Krugman of Princeton, said in his New York Times column that Britain was "playing a leadership role", with Brown's bank recapitalisation programme being superior to the US Treasury's plans to buy up toxic assets from the banks. Brown claimed that he was "rescuing the world". Intriguingly, press reports suggested that Bernanke at the Fed was instrumental in persuading US Treasury Secretary, Hank Paulson, that American policy should move in the British direction. 

A few months later, at the World Economic Forum in Davos, Darling described the underlying rationale for official policy in two sentences: "We have got to recapitalise first. You've got to get the expansion of lending." It was the imperative of "more lending" that justified the intimidation of the banks. As Marcus Agius, the chairman of Barclays told his shareholders, the banks had faced "an existential threat".