There is a serious problem with guarantees, especially ones handed out by desperate and unpopular governments. The more they give, the less credible these guarantees become.
What happens if, as is likely the banks actually call on these new guarantees? Taxpayers money will be used to cover losses. The amount of guarantees on offer are so large relative to GDP, that it would only take a small loan default rate to generate a financial massive hit.
What will the taxpayer get in return for these generous guarantees? A big fat zero.
"Jan. 16 (Bloomberg)-- Chancellor of the Exchequer Alistair Darling will announce a new round of guarantees for mortgages and corporate loans to spur U.K. bank lending as soon as next week, a person with knowledge of the plans said.
The guarantees would exceed the 100 billion pounds ($149 billion) that James Crosby, the former chairman of HBOS Plc who is advising the Treasury, recommended to stabilize the mortgage market, according to the person, who spoke on the condition of anonymity because negotiations aren’t yet finished.
The plans add to the 250 billion-pound credit line Prime Minister Gordon Brown offered banks in October along with a 50 billion-pound recapitalization. Brown has expressed frustration that the banks are rationing credit and refusing to pass on Bank of England interest rate reductions as the deepening recession drives up the number of bad loans."