A Modest Proposal #1: Recapitalise UK with Good Gov't / Bad Gov't split

If it's good enough for banks it's good enough for Government

The Gov't has appointed Rothchild to advise on splitting problem bank RBS into a Good Bank and Bad Bank (report). The idea is to speed the recovery of the useful parts (mortgages, business lending etc) by shoving the toxic loans and some matching debt into a sack to rot and fester at the end of the garden.

Bondholders are concerned that they might have a haircut forced on them if they wake up on the wrong side of the sackcloth. It may seem unjust for the bonds, which rank ahead of preference shares, Gov't B shares and ordinary shares, to suffer a loss when the bank is solvent and whose equity still has a value of £30bn. Always remember that, when in a tight spot, the politicians' expediency card trumps all.

If bondholders in a solvent bank can be burned, why stop there? Britain is struggling to recover under a mountain of state debt, so let's split off the bits we don't want and draw a line under it (© Tony Blair).

Good Gov't / Bad Gov't split

Good Gov't	Bad Gov't
NHS Education Transport Culture, media & sport Communities & Local Government Justice etc	£1200bn debt Defence Home Office DEFRA PFI Unfunded liabilities etc

Holders of Gilts can take an immediate 25% hit and more later if we feel like it.The Good Gov't can move ahead with reviving the economy with plenty of spending on jobs, roads and health. Income tax can be cut to 15%, corporation tax to 12%, making it the lowest in the EU.

A disadvantage of the split is the need for two General Elections, one for each Gov't. Perhaps Gordon Brown and Tony Blair will come back to jointly run the Bad Gov't, tied together like bickering conjoined twins in an uncivil partnership.