Bernanke, Blinder, Gertler, Benjamin Friedman and Stiglitz are American, and all of them have had teaching spells in the great East Coast universities (Harvard, Columbia, Princeton, Yale, NYU). They are a motley crew, and are far from sharing the same politics or agreeing about everything. However, in economics as in other walks of life branding makes a big difference to the marketability of what is produced. To non-economists — and indeed to most economists — the intellectual output of the East Coast universities more or less defines the latest and best in the subject. With all these distinguished names writing about credit and its importance, isn't it a fair deduction that credit — and, more specifically, bank lending to the private sector — must be vital to the health of an economy?

Such is the influence of the top East Coast universities that, when the financial crisis broke in autumn 2007, a universally-held view among policy-makers was that everything possible must be done to sustain the flow of new bank lending to the private sector. The lending-determines-spending doctrine was accepted without question. Few clearer statements can be found than those from the UK's own Prime Minister and Treasury ministers. As the crisis escalated last September and October, Gordon Brown emphasised that official action was needed to sustain extra bank lending and that his government's approach went "to the heart of the problem". In his view, banks had a "responsibility" to maintain credit lines to small companies and family businesses. 

But there is a problem with bank lending to the private sector. Because borrowers may not be able to repay, lending is risky. Banks must therefore have capital to absorb possible losses in their loan portfolios. So, the remorseless logician proceeds, not only is bank credit central to the nation's economic well-being, but public policy must concern itself with the quantity and quality of the banking system's capital. Because bank lending to the private sector matters so fundamentally to the economy, the government is entitled to interfere with the banks, and to tell them how much capital they should have and what form it should take.

If the reports and accounts prepared by tens of thousands of internal and external auditors are to be believed, in the first half of 2008 Britain's banks were profitable and solvent. Indeed, not only was their capital in positive territory, but also it was sufficiently positive to comply with regulations agreed with the Financial Services Authority. However, in late September and early October a number of officials at the Treasury, the Bank of England and the FSA got it into their heads that the economy was in deep trouble and that the banks were at risk of failure.