Some people believe that a drowning man comes up three times for air before finally succumbing. Put another way – he goes down three times before he stays there. Is that’s what happening with the banks?

Consider this week’s need to save banks that have already been saved once:

• The Royal Bank of Scotland, now the second largest British high street bank behind the new giant Lloyds Banking Group, lost two-thirds of its share value on Monday 19th because, big as it is, it is going to announce mammoth losses for 2008.
• Lloyds BG itself lost a third of its share value and, having had government money pumped in by the billion so it could take over HBOS, is now struggling not to let the state take 50 per cent.
• Barclay’s lost 25 per cent of its value last Friday and a further 10 per cent on Monday. Barclay’s turned down British government money last autumn in order to retain its independence and instead accepted Arab governments’ money (weird concept of “independent” that they seem to use at Barclay’s). Now it faces the same options again. But will the Arab sovereign wealth funds stump up again having already lost an estimated £2.5 billion? Or do the words “good money after bad” not have the same resonance in the Gulf?

While the ins and outs of US finance capital are even more beyond my comprehension than what happens in the UK sector, it seems as if approximately the same thing is going on in the US as Bank of America struggles to stay above the waves and Citigroup comes up for air a second time.

The way things are right now, people agree on the need to fix the problem, and most people seem to agree that it will take mind-numbing sums of money to do so.

Problem is there is considerably less agreement and clarity about how much money should be used to do what. The government’s current plan is to insure banks against 90 per cent of their investment and loan losses and reactions to it range from derisory to approving.

Meanwhile, European banks are being infected by the same lack of confidence from investors that we are seeing in the UK, with BNP Paribas, Deutsche Bank and Societe Generale all suffering losses of between 8 and 15 per cent on Monday. Those losses will probably creep up over the next week and spread to affect more banks further afield.

Losses are inevitable under any scenario because of the way investors behave in a market they no longer understand. It works as follows:

• Either investors are worried about the losses in UK banks and unimpressed by the government’s response, and worried therefore about how what happens in the City of London, which remains a major financial centre will affect the rest of Europe;
• And/or, in a few days’ time expect them to be impressed by the UK government’s response (which is, after all, the same as the response from the flavour-of-the-month taking office on Tuesday in Washington, DC)and worried that other governments are not responding in the same way;
• And when other governments do start coming up with their own second set of respiration measures for struggling banks, investors will worry that with all governments responding in the same way, misery will be equalised and there will be no safe havens anywhere.

I have, to be honest, very little idea about the best short-term way to keep the banking sector more or less functional, though I have no doubt that should be the aim of government policies the world over. But it does seem to me to be clear in the medium term – essentially, any time that there are two or three months without catastrophic losses, closures or further necessity for bank-preserving bail-outs – that the opportunity has to be taken to initiate a root and branch reform of the sector as a whole.

To my mind, while the increasing agreement that there must be strong regulation of the banking sector is welcome, it is not enough because its starting point is damage limitation and fire-fighting. Or rescuing a drowning man.

The keynote to a proper reform, it seems to me, must be to establish the idea that banking is a service. It is OK to make profits out of providing this service, just as it is acceptable to make profits from providing transport for public use. But it is a matter of national, social, community and individual interest that a service be provided.

That is, after all, the core of the current frustration with the banks. By looking after their balance sheets in a conservative way, having for years looked after them in a much too liberal way, they are not lending enough to help get the economy moving. The banks in the UK and many other countries, in short, are not providing a public service. That can and must change.

This would be an enormous task of change management. It would need to cover the economic basis of the banks, the technical issues of their loans-to-capital ratios, how they present their balance sheets, and what activities they are allowed to undertake (should a high street bank like Barclay’s be allowed also to be a major investment bank like Barclay’s, for example?), and it would need to be accompanied by a major cultural change within the banks because the short-termism, obsession with the bottom line, and the lack of attention to financial and economic history that are endemic throuhout the broader finance market sector are a significant part of the problem of how banks have behaved.

The sad story of the Long-Term Capital Management hedge fund is emblematic. LTCM’s appeal to investors was based on the idea that it was run by extremely clever people with superb capacities to calculate complex risk. It collapsed after four years, losing billions, of course, undone by the Russian debt default in 1998 and its effects on share values.

Niall Ferguson’s The Ascent of Money has a neat short history and explanation of what happened; he depicts it as a clash between the orderliness of Planet Finance, which the LTCM managers understood, and the often chaotic reality of Planet Earth, which they didn’t.

At the end, one of the founders of LTCM – a Nobel prize winner, mind you – reflected on it all and said, “If I had lived through the Depression, I would have been in a better position to understand events.”

Yes, or he could have read about it like the rest of us. And then he might have appreciated that the response to the financial chaos that helped usher in the Depression was indeed an era of managed banking in which capital flows were controlled.

Perhaps a version of that settlement is the way to go today.