The 0.5 per cent plunge in the UK’s GDP in third quarter marked the start of the UK’s first recession in 17 years. And worse is expected to come.

The government’s recapitalisation of the banks is not expected to stop lending growth from slowing sharply. Meanwhile, house prices are likely to fall by another 20 per cent or so and unemployment is set to rise by around 1.7 million.

The possibility being discussed by various economic think tanks is that the recession will last at least two years and result in around a three per cent fall in output, thereby exceeding the 2.5 per cent fall seen in the early 1990s. As a result, it is believed that interest rates will have to fall to an all-time low of one per cent soon.

Output and industrial indicators revealed that the UK economy entered recession with a bang in Q3. And the forward-looking surveys suggest that activity is set to weaken further. Household indicators show that consumer sentiment remains fragile, consumer spending growth is slowing and house prices are still falling.

External indicators suggest that any benefits from the further fall in the pound will, at least in the near-term, be more than offset by the marked deterioration in overseas activity.

Labour market indicators have revealed a further sharp deterioration in its activity. This is keeping pay growth well contained. Inflation indicators showed consumer price inflation rising above five per cent in September. But it is now set to fall sharply.

And according to Capital Economics Ltd, a London based research firm monetary/ financial indicators show that the markets now expect that the Monetary Policy Committee of the Bank of England will cut interest rates aggressively to around 2.5 per cent. But the CEL thinks that they will fall to a record low of one per cent. Meanwhile, the government’s innovative measures to infuse new life in the credit market have so far failed to yield the desired results.

Lloyds TSB has laid out plans to pay dividends to shareholders from next year.The HSBC has announced that the bank would not pass on cuts in interest rates to customers. Both Lloyds and RBS have assured staff that they will keep paying out bonuses.

These are only three examples of the way banking sector appears to have decided to flout the terms of the £500 billion bank bailout package announced by the government of prime minister Gordon Brown last month. Bank executives appear to be treating the package something like a ‘free lunch’.

The question being increasingly asked under the circusmtances is, would the government force the banks to comply with its conditions now that it seems the banks would not be doing it by way of reciprocity?

On October 13 while announcing the details of the package the Chancellor of the Exchequer Alistair Darling had said that there would be “guarantees” on lending to businesses and to would-be homebuyers, that there would restrictions on the pay package of top executives and that the dividends would be restricted.

This package along with its conditions was put together in consultation with the British financiers. It was hailed throughout the world and copied where it could be. But so far one has not seen the volume of lending rise.

In fact, banks still do not know what is the safe lending limit. The government expects to see the lending go up to the boom period levels. But burnt fingers are taking their own time in healing. So, there is hesitancy even in the lending for small bsuinesses.

It was understandable that circles which are watching the bailout of a life-time, one on which prime minister Brown has staked his political future heading for a disastrous failure should call for a ‘hands-on’ intervention by the government. The Chancellor has used the taxpayers’ billions to buy a big say in these banks’ boardrooms and these circles are calling on the government to make its say heard by banks and complied with srtictly.

The foot dragging by the banks in complyting with the terms of the bailout package is being seen among some circles here as gross irresponsibility of the sector. They believe the sector had failed to understand the enormity of the problem and failed as well to see the looming danger threatening the very plank on which it has thrived. They feel justified in demanding stricter enforcement of regulations to save the sector from repeating its mistakes of the last ten years during which it created enormous wealth without genuine asset based collaterals and then distributed this ‘hot air’ all around.

The father of this damagingly wasteful financial laisse faire, Alan Greenspan, the former chairman of the Federal Reserve has tried to minimise his blunderous belief that the market would take care of itself by saying : “I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms.” Markets are not made to correct themselves; they are made to consume the market makers.

Early last week Alistair Darling, the Chancellor, Adair Turner, the head of Financial Service Authority and Mervyn King, the Governor of the Bank of England all appeared before the Treasury select committee to answer for the way they had handled the crisis. But their answers made no one any wiser.

Every one in the decision making position in the wealthy world appears to be in state of denial. They are refusing to see that free market has failed and the Washington consensus has also failed.

It is time to go back to the basics: Return to interventionist governments regulating from very close quarters their respective national financial sector.

Will Hutton writing in the Observer ( November 2, 2008) said: “The socialisation of the financial system may, paradoxically, be an imperative to save capitalism…Keynes was the economist whot put it all together, the liberal who understood why free finance is capitalism’s greatest enemy.”