Margareta Pagano: Why Gordon Brown will eat his wife's hat

Essex and HSBC show alternative microcredit ideas

At a time like this we can do without the genius of spin who came up with the wheeze of leaking the £7 price of Sarah Brown's beret. Such gimmickry won't stop the able-minded among us noticing that the Prime Minister's recovery plan is not taking off.

Gordon Brown may well end up having to eat his wife's hat; he hasn't even got the style right. For the record, the fashion industry's attempt to bring back the beret has also failed.

The Prime Minister cannot claim he hasn't had a fair wind. Commentators and experts from across the political spectrum have given him the benefit of every doubt since he started on his personalised road to recovery. But cracks are opening up in the tarmac. Professor Noreena Hertz, a thoughtful political economist, was particularly harsh, rebranding it "the road to nowhere" when she appeared on Newsnight last week.

Brown's roadmap is going nowhere because none of his actions are tackling the real problems: Libor, the rate at which banks lend to each other – or do not lend to each other – is still stubbornly high. Banks, despite being bullied by ministers such as Lord Myners, Baroness Vadera and Lord Mandelson, are still not lending to each other, mainly because they still don't trust one another. Nor are the banks passing on the rate cuts in full to the majority of home borrowers. Bashing the banks for this is too simplistic, although the reason they are not is simple enough – they too have to earn margins.

The Government can't have it both ways; it is bashing the banks to lend more and at the same time forcing them to have much higher capital ratios to comply with Basel 2. This muddle doesn't inspire confidence and makes all the bankers I talk to extremely nervous about relaxing their lending policies. Something has to give. The Government should also move quickly with other proposals such as allowing the banks to sell their corporate loans to other investors – backed by guarantees – thus freeing up their balance sheets. This is what the Germans and French can do more easily through their state-backed banks.

Brown's other wheeze, providing mortgage-borrowers with a two-year interest holiday is storing up problems for the future as borrowers may well end up paying even more money back at higher interest rates. The plan is undoubtedly well-meaning but it has not been thought through. Nor does it help first-time buyers who are the ones who most need house prices to fall.

Attempts to get us spending are also doomed. Consumers are defying Government's exhortations to spend more because they are terrified about losing their jobs. Savers are also being penalised for their past thrift. It's ironic because ultimately it will be savings which will be needed to help reinvigorate the economy when the recession does work its way through.

Asking banks to lend, or consumers to spend, is rather like giving a bottle of whisky to a reformed drunk. The last thing the thing the banks should do is go back to their old habits while capital ratios are still so fragile – and they still do not know the full horror of outstanding loans and potential corporate defaults. And the last thing we consumers are going to do is spend or borrow more. Indeed, it would be imprudent to do so. That's what got us into trouble to start with and, even though it was a harsh lesson, people have clearly learnt it. So it's quite extraordinary that Brown, and his praetorian guard at the Treasury, don't seem to get it.

But there are alternatives. By far the most interesting is the pioneering idea from Essex County Council, which is setting up a US-style community "Bank of Essex" to help businesses which are being snubbed or over-charged by the big banks. The plan is for the new bank to borrow emergency funds from the European Investment Bank and funnel cash directly to businesses in trouble or to even to those that want to expand. There's clearly something in the Essex waters that promotes innovation because the council is also setting up a credit union, as well as new apprentice and savings schemes.

Another radical proposal which has legs comes from Colin Breed, a Liberal Democrat MP who sits on the Treasury select committee. He wants to set upmutually owned community banks – not dissimilar to what the Victorian did when they created building societies which, sadly, we went on to destroy. Under Breed's plan, councils, pension funds and regional investors such as utilities would provide the banks with funds which would then be lent locally at the micro level – sole traders who are ignored by the big banks.

This is just the sort of imaginative idea we need in such dire times; it breaks the stranglehold of the big banks and brings new entrants into the market which is as it should be. Apparently the Financial Services Authority is luke-warm to this proposal, which is a pity because it could help break the present paralysis in lending.

Getting the Government to guarantee loans to small business is an excellent idea being pushed by George Osborne. The shadow Chancellor wants the Government to back a proportion of the loans being lent to small business by the high street banks. This has the benefit of taking the risk on to the Government's balance sheet but allows the banks to make the decisions about who gets the loans. This gets credit moving again for small businesses, thus helping preserve jobs, which must be the biggest priority right now.

That's why HSBC's decision to invest £1bn of new money into small businesses is the best sign of confidence we could hope for. HSBC did not have to take the Government's shilling and is now one of the UK's strongest banks. This fund shows the credit market is starting to work again.

Brown will soon learn that he can't buck the market. Let the market fix itself; just as Essex is showing with its new bank and HSBC with its new fund.