Brown's gamble may save the banks but the economy cannot wait

It parallels that similar fraught weekend three months ago, after the collapse of Lehman Brothers, and the subsequent heart attack suffered by almost every other bank. Government paramedics did a good job then in keeping the banking system breathing, with adrenalin supplied by the injection of upwards of £27 billion in new capital from the Exchequer.

But even that drastic treatment turns out not to have been enough to restore the banking system to full health. It is basically still too weak to stand on its own feet and undertake a full day's work - in other words, to provide the British economy with the lending it needs to keep turning over at normal levels of activity.

The Government knows that the less the banks lend, the greater the slump will be, as businesses are forced to contract for lack of working capital. But they also know that by straining too hard too soon to lend normally, the banks have brought on a relapse. Hence their return this weekend to intensive care and the hope that this second major operation will do the trick.

To be realistic, though, is to have doubts: which is not to say that the Government is wrong to act but rather that we live in such unprecedented times that no outcomes can be certain. The Treasury is operating at the limits of knowledge, and there is as much trial and error as proven science in the treatments being attempted.

Over the weekend, for example, it was discussed whether Government should create a new nationalised bank to take over and manage down all the bad loans on the books of the existing banks. The logic of such an arrangement would be that this would put a floor under banks' losses and leave them shrunken but clean and, therefore, able to attract new private investors to finance their future. It would, however, have cost a fortune and, some say, let the banks off too lightly.

In the event the Government has decided to stop short of this - at least for the moment - and instead opt for an insurance-based solution already tried in the United States, which they hope will achieve the same result in a different way. The banks will still hold the toxic assets but the Government picks up the bill for losses once they pass a certain, as-yet-undisclosed point.

This approach has twin advantages. It does not cost money immediately and it ducks the crucial issue of what the distressed assets in question are worth. This is important, given that no one knows the answer - this indeed being the reason the problem is so intractable.

Nor was this all that was talked about by Treasury officials and the banks this weekend. Easing the terms of the initial bail-out is under consideration but in a way which would lift the Government stake in Lloyds TSB even higher. It was discussed, too, whether Northern Rock should get more funds, so that it could start providing new mortgages - a reversal from the current policy, under which the bank is being run down. Further mortgage finance might also come from a plan to revive the asset-backed securities market by removing the risk to investors with yet more government guarantees.

As should be clear from all this, basically anything is now on the table. No idea is off limits or too outlandish. As Lord Mandelson, the Trade Secretary, said the other day, the Government is committed to doing everything possible to revive the system.

We might as well believe that ultimately they will succeed. But the bigger question is whether the banks' rescue will come in time for the rest of the economy.

Yet for all that, it is hard to think Government could have moved much faster, given how far we have come in less than six months. It is quite astonishing what has happened.

One of our largest banks, RBS, is nationalised in all but name; another, Lloyds TSB, has taken over HBOS, so now the whole lot is teetering on the brink of state ownership. Meanwhile, Bradford & Bingley and Alliance & Leicester have been sold to a stronger Spanish bank. Everywhere you look, the sums of money tossed about are so vast they become impossible to visualise.

The fall from grace not just of the banking system but the global economy is unprecedented in its suddenness, its pace and the extent of the decline. There is no bottom in sight yet. In this regard, today's developments, momentous though they are, will not change much. To avoid economic disaster you need solvent banks. But on its own, those are not enough. You also need confidence.

Yet here there are reasons for hope - or so the authorities would have us believe. Ben Bernanke, the chairman of the US Federal Reserve, said in London last week that all these initiatives and those under way in other countries were gradually moving the banking system on to firm ground.

There would, no doubt, be further setbacks but with each passing week, they were getting a little healthier and markets were becoming a little less frozen.

The rate of progress may seem glacial in a 24-hour media world addicted to instant results. But, he said, it was nevertheless movement in the right direction. In time - in about six months or so, Bernanke implied - this return to stability should be more apparent and confidence should begin to come back.

However, if a week is a long time in politics, then six months is an age in a business where the funds have been cut off. In a private meeting with the Government last week, one well-known industrialist is believed to have laid down a challenge: "I closed for longer over Christmas, like you said. I negotiated a wage cut, like you said.

"I have put my people onto a three-day week, like you said, but I still have no orders. No one is buying what we produce and the bank will no longer give me credit. What do you want me to do now?"

The Government had no answer to that problem. They hope the banks will, after today's latest bail-out. But no one is making any promises.