In the event, their reservations about the predictive power of credit aggregates were neither here nor there. In late 2008 policy-makers were bossy and crude in their demands that the banks lend more and have enough capital to support the new loans.  More bank lending was deemed to be good, without ifs or buts. To repeat Darling's words, "We have got to recapitalise first. You've got to get the expansion of lending." Bluntly, the statistics justify neither official policy nor Darling's hectoring and aggressive tone, while Brown's claims to be "rescuing the world" have come to look ridiculous. In no economy are there reliable relationships between bank lending to a particular sector and activity in that sector or the wider economy. In that sense the bank recapitalisation exercises were sold on a false prospectus. 

Another enigma here is that the alternative view — that in the long run, national income is a function of the quantity of money — has clear and overwhelming substantiating evidence from all economies at all times. Both evidence and standard theory argue that the expansionary open market operations that are the hallmark of quantitative easing, not bank recapitalisation, should have been policy-makers' first priority last autumn. In the next crisis they must accept that money, not bank credit by itself, is the variable, which matters most to macroeconomic outcomes. 

Photo: PA Photos