Osborne went considerably off the leash with his claims, saying that Labour secretly planned to raise income tax, and implying that civil servants had, in allowing the plans to be forged, given up something of their political impartiality. Stung, the servants told Osborne to drop the Hardy Boys schtick – the “secret plans” were actually in the public domain as part of the Budget, and the increase in income tax was tied to the ongoing growth in the economy.

He’s set in motion the kind of political Pokemon battle we get every election cycle, where each side fires its rhetorical magic at the other in turn, until one of them emerges the victor – so much for Osborne’s recent condemnation of electioneering. But with his vicious fireball deflected by the backroom staff, he was left dangerously exposed over the weekend. Mandelson, I choose you!

The business secretary and veteran political warhorse described Osborne thus: ”Like a boy in a man’s job”. Saucer of milk, etc etc, but while we wait for the homophobic reaction that dogs Mandy’s every move (let alone when he’s talking about boys and men) David Miliband has also slagged Osborne, describing him as “not a serious person”. He described the Tories’ tactics as “juvenile and student politics…the politics of the big lie and the big smear”. Treasury Chief Secretary Liam Byrne added: “this truth problem for Mr Osborne is becoming a pattern of behaviour”. Vince Cable meanwhile has managed to get mileage out of both his opponents in a single sentence, saying: “The public doesn’t need George Osborne’s imaginary secret documents or conspiracy theories to work out that the public finances are in a bad shape”. 

The Tories were also hurt by the Lib Dems rooting through their post-election plans and finding over £50bn of spending pledges that don’t really chime with Osborne’s prudence – new-school policies like high-speed rail sit next to classic Tory stances like cutting inheritance tax.

While it’s all good fun to see the internecine bitchery of The Hills get transplanted onto the UK’s political scene, this all seems like a case of electioneering distorting the genuinely necessary action. Cuts will be an inevitable part of the next government, whoever it is – the public discomfort at a rocketing deficit can’t be ignored. But the need to score points off and differentiate themselves from Labour has drawn the Conservatives, and to an even greater extent the Lib Dems, towards a economic model based on arch prudence. This is framed for maximum gain as brave and wise, positioned opposite Labour’s supposed recklessness with the public balance sheet.

But it’s too soon to make cuts, and using them as such a hot political topic is dangerous; fiscal stimulus needs to carry on for some time yet. Keynesian economists like Robert Skidelsky and William Keegan have written over the weekend about the importance of letting fiscal stimulus continue, Skidelsky with a simplicity that is either charmingly optimistic or dangerously reductive depending on your leanings: “Had the Government given everyone a spending voucher of £500 last Christmas, the chances are we would have had no output gap and full employment today!”

But for all the weirdly mechanistic and presumptive nature of Keynes, his ideas are still valid, and to ignore them for brief political gain would be disastrous. The recent crowing about the end of the recession, along with the City-minded political economists, means that talk of cuts might not seem too premature, but if the stimulus is cut back before much of the country has had time to feel it, then any future government could find itself with a hole where its income tax should be. Once the economy is genuinely growing again, with consumer spending steady, then we can start worrying about the deficit. At the moment, all the talk of cuts is only benefitting political strategists.

Kingman apparently found the public sector more “fun”, but yachts and early retirement are also “fun”, so the move is understandable. The rest of the UKFI gang had come from lucrative careers in the private sector, before doing some public time to buff their legacy; Kingman has almost always been a civil servant, so we probably shouldn’t be too hard on him wanting to make a pot of money at this point in his career. Still, you might have thought he’d at least wait until Northern Rock was released back into the wild; they’ve been courting smaller banks like Virgin Money in order to broaden the competition in the now very small world of high street banking, but any deal is miles away from being settled. Vince Cable said yesterday: “His departure at this time will leave a massive hole.”

At the same time as Kingman leaving, UKFI finally appointed a chairman in the form of Sir David Cooksey, who takes over from acting chairman Glen Moreno, who’s ended up being in the job for six months. Cooksey is a UK business legend, founder of £500m-strong venture capital unit Advent, and a director at places like the Wellcome Trust, London and Continental Railways, and ENRC. Again, he’s not taking the position for the money – his salary is just £100,000.

The difficulty for him now is the political sensitivity of hiring the next chief exec. The candidate is likely to come from the private sector, like a bank or hedge fund, given Cooksey’s relative lack of banking experience, but such a person would need to take a huge wage cut if their salary was to match Kingman’s. Being UKFI chief exec next year is a rather thankless task, negotiating around a general election and a potential power shift, as well as applying ongoing pressure on banks to provide credit while keeping out of their affairs as the UKFI has said it must. So a private-sector-sourced chief exec will demand more money; expect indignant headlines and political point-scoring over the perceived lack of value that UKFI is providing the taxpayer by paying higher wages.

Equally hard is the conundrum of where to source the post from. would any former banker be able to do anything but act punitively towards his former peers without accusations of backscratching and nepotism? If a banker wasn’t chosen though, the appointment would be open to accusations of irrelevance and lack of experience. Wanted: formerly well-paid person for task that will prove impossible to please everyone with. Any takers?

First, the bad – structurally, the new order is as open, if not more so, to the kind of infighting and barriers to progress that it was before. The tripartite system, with responsibility being shared between the Treasury, the Bank of England, and the Financial Services Authority (FSA), managed to ignore each others recommendations throughout the period of rampant overleverage and negative equity lending and the like, but it’s being kept. There’s a new Council for Financial Stability, where the heads of the three bodies will meet to discuss crucial issues, though they actually already do that in a standing committee in the Commons, so how much that can be relied upon to effect change is pretty debatable. The hope is that the increased transparency of the Council will prevent ideas being dismissed without proper debate – the danger here is obviously the opportunity for electioneering and political point-scoring, as well as interminable squabbling.

Surely it would be better to beef up the FSA, and have it solely responsible for carrying out regulation, leaving the Bank to its historic role and the Treasury to form policy? As it is, the system is open to the kind of spats we’ve seen between the bodies recently; indeed, it could be said that Mervyn King has been kicking up a fuss merely to highlight these weaknesses of the tripartite system, and thus staking his claim for the Bank to wield much of the power. Though Darling claimed yesterday that the Bank didn’t want to become a banking regulator: “That is not a power that the Bank is seeking at the moment”.

But while the balance of power looks set to continue see-sawing, the actual proposals in the white paper look sober and sound. There was more faith in maintaining high capital levels in banks, though again the actual levels were not set in stone; there are also heartening (yet equally vague) gestures towards preventing boom and bust cycles in the economy.

Banks themselves will be pleased with the decision not to split investment and retail branches of major banks, though the current bubble, with a handful of banks holding much of the assets and generating huge profits from them, looks set to burst and the government demands more competition in the sector (the doling out of Northern Rock assets will be one of the first steps in this process). The banks will not be happy with the proposal that they maintain a pool of cash for paying back depositors who stand to lose money if their bank fails – they argue that having this pool, rather than allotting government funds when the time comes, is expensive, inefficient, and that governments would need to spend bailout money anyway. They may have a point – this can be seen as a bit of a votes-winning exercise, to show how in thrall Labour is to its people rather than to bankers, rather than a truly effective way of dealing with times of crisis. Nevertheless, it at least toes Labour’s prudential line.

The opposition parties have been quick to attack –  George Osbourne going after the tripartite system, saying that a Tory government would hand powers over to the Bank, and create a consumer watchdog in place of the FSA; Vince Cable going after the lack of a proper pay cap in the City – “There will be champagne corks popping all over the City this afternoon – the Chancellor’s statement proves that it really is business as usual.”

This kind of beef is inevitable, and the point of a white paper is to have the details filled in over the forthcoming weeks. The proposals are sound – let’s hope they can find a path through the system into being.

The full sorry story is in today’s FT, and is well worth a full read. Shocking details include a “book” of mortgages, worth tens of millions of pounds, classified as “full status” (mortgages with full evidence of borrower income) but actually not having any proof of income – the FSA reacted to this by just telling mortgage lenders to have a really proper good look at everything before they buy it. The whistleblower accuses the FSA’s attitude of ranging from “indifference to wilful ignorance” about the mortgage market; smaller mortgage providers were “being eaten alive by cynical, rapacious and short-termist investment bankers” while the FSA stood by. We know that the rating agencies are also at fault for highly rating packages of securitised loans that contained toxic assets, but this is pretty damning of the FSA.

It’ll be interesting to see how the FSA reacts to this, as they’ve already made a concerted effort to tighten up regulation – chairman Lord Turner’s report from last month outlined a range of methods to make the financial services industry a better, less dementedly money-making place. Better liquidity and capital ratios, new accounting rules, not dealing in products that no-one really understands, that sort of thing.

Unfortunately they’ve now also got to explain away the £200,000 in Christmas parties they had. Bad luck to the team who had to go to Madame Tussauds like a group of schoolkids on their last day of term…

As the banks will have to pay a lot or cash and/or shares to the government, the shareholders can’t see when they’re ever going to get premiums again. So share prices tumbled across the banking sector, especially in RBS, where they collapsed 70% yesterday, leaving them a long way from their post-Natwest/ABN-Amro takeover pomp, where they were valued at £75m. They rallied this morning, but once the bargain-hunters deserted they’ve started sinking again. Lloyds and new bosom buddies HBOS lost big today as well, adding a 35% drop so far today to their 34% drop yesterday. The plummeting graph lines have instilled a subsequent loss in confidence in sterling, which has fallen to a seven year low against the dollar ($1.3934 to the pound). Fan on high, shit everywhere.

Former RBS chief Fred “The Shred” Goodwin, who scythed through the burgeoning workforce gained from endless takeovers, has been feeling the cold steel of rejection the last couple of days as the world points the finger at him. Gordon Brown refused to answer whether Fred should lose his knighthood, but he did lay into RBS for their involvement in subprime and their over-reaching in the ABN-Amro deal. The Glasgow Herald ran with the rather more unequivocal “Make Goodwin Pay For Disaster” – “A total of £45billion lost or written off. Shares at a 25-year low. Fears for thousands of jobs. No light at the end of the tunnel. Thanks a lot for nothing, Sir Fred Goodwin”. Former environment minister Michael Meacher said he should be “unceremoniously stripped of his knighthood”, while Vince Cable said: “He should never have been given a knighthood in the first place.” Taste shred, Fred!

But Nils Pratley in The Guardian is right in saying that it’s the wrong time for admitting wrongdoing or indulging in some Fred-bashing – what we need is confidence delivered via strong assertions from people like Stephen Hester that this plan is going to work, not that he’s really sorry about the ABN Amro thing, it won’t happen again.

The government needs to sail between the Scylla of overwhelming public and press outrage, and the Charybdis of shareholder desertion. We know the sums involved are going to be huge, and that value for the taxpayer must be considered, but if the government take too much shares or cash off the banks out of fear of a violent public reaction, then shareholders will lose too much faith and send the banks share prices down, pushing them towards certain nationalisation. It’s also foolish to call this a bad bank in all but name – potentially toxic assets can still be saved under the government’s scheme, rather than consigning them to certain taxpayer-fronted losses.

The government is trying to preserve a dynamic, competitive banking system that, despite its horrendous mistakes, could still lift us out of recession provided the government’s demands that lending be effected are properly enforced. A stagnant nationalised model is less likely to do that as swiftly or decisively.

First up are Nomura, the bank that took on bits of Lehman and then didn’t look as strong as we all thought. They’re saying that Asian markets are going to be just fine while the US deteriorates, “with Asia being invited to form a new global financial structure”. It comes in their Warren Buffett-esque assessment of the quality of Asian companies’ stocks, in their paper (adopt booming movie-trailer voice) “Titans, Heroes and Mortals”. Their Asian “titans” include Acer, SingTel and the aptly named Want Want China Holdings.

But their confidence is skewered somewhat by Ambrose Evans-Pritchard in the Telegraph, who after crossing his palm with silver tells us: “The great surprise will be the ferocity of the downturn in China”. Other Telegraph predictions are mostly depressing: “Recovery from recessions always takes many months (or sometimes years) longer than people anticipate. In this case, the wait will be even longer than in previous episodes: assuming we do escape from the perils of debt deflation (by no means an assured outcome) we will then face the challenge of constraining inflation with higher interest rates”; about the stock market they say: “one thing can be expected. Volatility will continue with large daily swings the order of the day”; “lending levels for the next one to two years will be very subdued.” Where’s the bit about the tall, dark and handsome stranger?

But their glumness is shared with Craig Brown at Seeking Alpha, who deals the financial-prediction equivalent of three “death” cards – he predicts a rise in bankruptcies, unemployment over 8%, zero lending, and house prices still in decline, before wailing and gnashing his teeth, saying that the EU will disband and encouraging people to “lock those doors” amid a poverty-induced crime spree. Tim Lacono gives us an example of what passes for optimism over at Alpha: “The question today is whether what happened in 2008 was Armageddon – Part I, or just plain Armageddon. As you’ll see below, from my vantage point, it looks more like the latter.” Thank heavens!

Who else? Ben Wright over at the Wall Street Journal says that banking culture is set to change completely, with boards and executives being overhauled, simplicity taking the place of complex derivatives (bit late, but never mind), and hedge fund managers saying sorry for all the trouble they’ve caused. Meanwhile Vince Cable says: “The battle for survival will be thoroughly nasty…there is a danger of the vulnerable being trampled underfoot”, cheering somewhat to add: “for those in secure jobs with decent employers and with low debts, there are few worries”, before the crystal ball gets all scary and brimstoney, and he forsees massive civil unrest and extremism: “I see the personal and party animosities played out every week at Westminster and wonder if the political classes are capable of grasping the enormity of the crisis we are in and the challenge to us to behave differently. If we do not, the public will become seriously angry. We know from history that such anger can lead to extremes.”

Brian Eno, of all people, continues Cable’s theme: “What if it comes to feel like there isn’t a long term—or not one to look forward to?…Resources that are already scarce will be rapidly exhausted as everybody tries to grab the last precious bits. Any kind of social or global mobility is seen as a threat and harshly resisted. Freeloaders and brigands and pirates and cheats will take control.” So that’s what working on a Coldplay record does to you.

Still, at least we’ll be having more sex. And England will win the Ashes. And we’ll be reading each others minds. And we’ll be wearing bold or nude lipstick while its all happening. Happy New Year!