Despite owning hundreds of billions of dollars of hard-to-value assets, banks seem now to regard as unnecessary the American government's scheme to purchase toxic loans and securities. Those European lenders that did not get state capital are patting themselves on the back. The message is clear: we never needed government help, and we don't want it now.

2008 and all that

That is both wrong and dangerous. Wrong, because in the depths of the crisis the share prices and borrowing costs of all banks indicated an almost complete collapse in confidence. Some firms did perform better than others, but only relatively so. All the banks benefited from an implicit state guarantee. Even those lenders who never got capital would probably not have survived without government rescues of weaker firms to which they had counterparty exposures.

Similarly all banks are now plugged into government life-support systems. Their liquidity is supported by more generous collateral rules at central banks. Profits are being boosted by rock-bottom short-term interest rates. Some banks have managed to issue debt without public guarantees, but the system needs to refinance $26 trillion of wholesale funding by 2011; without an implicit state backstop this would surely be impossible. And the value of banks' assets is being sheltered by central banks' asset purchases and more generous accounting rules. The truth is that the West has a thinly capitalised banking system that is being allowed to earn its way back to health. Save for defence and space exploration it is hard to think of a privately run industry more dependent on the state.

... contd.