The UK government and Bank of England have today announced plans to inject some £50 billion of capital into the money markets by way of an asset swap with the clearing banks of the UK. Under the arrangement the banks will be able to swap a portfolio of their more risky mortgage investments in return for government bonds – with a total of £50 billion on offer during the 3 years scheme. Surely £50 billion will be enough?

On the surface you would surely hope that £50 billion would be enough to bail out the markets and increase liquidity again, but there are some who have their reservations. For many observers the “fix” has come too late to save many leading financials from disastrous losses, but on the other hand why should the taxpayer affectively bail out the banks for what has been a sustained period of greed within the financial sector?

There should be little risk to taxpayer’s money because the banks will be asked to swap assets with a much greater book value that the bonds which they receive in return. The commercial banks have also agreed to underwrite any losses on these asset swaps, thereby ensuring no loss for the taxpayer – in theory!

This type of move has never been seen before in UK markets, then again we have never quite been in a situation like we are today. By affectively switching their more risky assets off balance sheet and bringing onboard bonds which are guaranteed by the government, this should free up a large amount of liquidity. Not only will this liquidity benefit the clearing banks, but it will also allow the smaller financial institutions to borrow in the markets to get their business wheels in motion again.

This is a final throw of the dice by the government and if there is even the slightest hint of failure with this they will lose all face with the markets and voters. The fact that it has actually taken so long to decide upon this action has surprised many, because for the price of the taxpayer’s investment into Northern Rock they could already have had a similar scheme in place.

Many market observers are expecting to see a short term upturn in sentiment and then it will be down to the markets to find a level of risk and reward at which they are most comfortable. This £50 billion is no quick fix, it will not put right the wrongs of the market overnight but it has a great chance of setting the wheels of the economy moving again.

While the current government can afford to wait until 2010 to call the next election, it really will take some time to get the economy back on an even keel. Even though the money markets may start to show more signs of life, and a certain degree of confidence will return, many in the UK will still have to go through the pain of financial losses, employment worries and housing repossessions – which is all part of the boom and bust culture which all developed economies go through at regular intervals.