Barry Eichengreen and Kevin O'Rourke have been keeping tabs on the recession that started in 2008, comparing it with the Great Depression. Their early analyses suggested that the paths of the two events looked alarmingly similar. Their most recent update, available here, suggests that the global economy has pulled out of recession and that the pattern of economic activity now looks very different from that observed in the late 1920s and early 1930s.

Eichengreen and O'Rourke argue that 'policy deserves considerable credit' for the recovery. Moreover, they note that 'considerable excess capacity remains in a number of important economies. Exiting now from policies of stimulus in those countries would therefore be premature.'

The Association of Graduate Recruiters has published a new 'manifesto' for graduate recruitment. Its calls to action include the abolishment of the 50% target age participation rate for higher education, and a lifting of the cap on undergraduate tuition fees.

The manifesto has met with a mixed response, and has been criticised by both unions and government - not least because these groups see the economy as dependent on high skills, and so they support the 50% target.

A further recommendation in the manifesto is that tax breaks should be introduced for the employers of new graduates. The case is not well argued. Breaks given to employers conditional on the adoption of certain recruitment practices have often backfired, with employers shedding labour of other kinds in order to increase their hiring of the subsidised type of labour.

The headline in today's Times states that the 'shock deficit threatens UK recovery'.

On the same day, more than 60 economists have signed letters published in the Financial Times, arguing that moves to reduce the deficit should not be rushed since this would risk a return to recession.

The deficit (that is, borrowing over the year) is large, but the debt (the sum of deficits accumulated over the years) is not. For sure the deficit needs to be tackled sometime soon, otherwise the debt will grow, and ultimately servicing that debt would become a problem. But, in comparison with many other countries, the UK has started out from a good place.

Ponder for a moment why the deficit has grown. National income has declined by over 6% during this recession. During normal times, it grows by an average of about 2.5% per year, so national income is now around 10% lower than it would be had we experienced trend rates of growth over the last couple of years. As national income falls, tax revenues to government automatically fall. This fall has been of the order of £45-50 billion. At the same time, government spending on benefits automatically rise as the recession takes hold. Add to this a variety of special measures that have been taken, and which are time limited - the cut in VAT, the preponing of major construction projects and so on. This all suggests that a substantial proportion of the budget deficit is due to the recession (automatic stabilisation policy) and to deliberate attempts to minimise the impact of that recession (discretionary stabilisation policy). The deficit is there, in large measure, precisely to bring about UK recovery - not to threaten it.

This means that the Times headline is 'through the looking glass' economics.

For sure, books need to balance over the long term. The best thing to do to bring that balance about is to support the recovery. Once the recovery is properly under way, public sector cuts will be needed, and those cuts will hurt. The patient needs to be strong enough to take the medicine. Supporting the recovery calls for careful treatment, not knee-jerk reaction.

The CPI inflation rate rose to 3.5% in January. Since this is above the 3% threshold, the Governor of the Bank of England must write a letter of explanation to the Chancellor of the Exchequer. He should not find this task too daunting. The rate of VAT rose back to 17.5% in January following its temporary reduction to 15%. As a result, for the next 12 months, the headline inflation figure will be artificially high.

Far from inflation and overheating, the threat that the UK economy continues to face comes from a recovery that is, as yet, still very weak. The danger of a return to recession is a real threat, and the temporary blip in inflation should not serve to disguise that fact.

A letter in today's Sunday Times, written by a group of eminent economists, argues for early implementation of government spending cuts. I was a signatory to an earlier letter in the Financial Times that argued the opposite. What should we believe?

There is, for sure, a substantial government budget deficit - currently around £140 billion over a year. A significant part, somewhat more than a half, of this is due to the operation of so-called automatic stabilisers - the tendency for tax revenues to fall, and government spending to rise, during a recession. More is due to the deliberate rescheduling of government spending on projects - bringing them forward so that the economy can benefit from an early injection of spending. This being so, the public finances can be expected, in some measure, to 'rise with the tide' as the economy recovers.

Nonetheless, there will be a need for substantial cuts - nobody disputes that the structural budget deficit is indeed large. Timing is of the essence. While the economy remains fragile, cuts will be premature. Yet confidence in the public sector's ability to manage its debt depends critically on a credible plan being put in place. What is needed quickly is the promise of such a plan; the cuts themselves should wait a while until the recovery is more secure. If we can achieve growth of 1.5% this year, then there will be scope.

Sir Michael Marmot's review on health inequalities in the UK has just been published. The inequalities that are highlighted are startling, and in themselves call for action.

One of the review's proposals refers to the minimum wage. The review cites work by which argues that a full-time worker on the minimum wage enjoys earnings that are insufficient to meet public expectations of an 'acceptable minimum standard of living'. It then argues for 'the coordination of social support, tax systems and minimum wage levels necessary to enable full implementation of minimum income for healthy living standards'.

This raises several issues. First, the link between the minimum wage and household incomes is tenuous. Workers who receive the minimum wage are not necessarily the chief income earners of a household. Even if they are, they may be in minimum wage employment for short spells in between longer spells of more remunerative work. Many workers who receive minimum wages work part-time. In many cases, young people work in jobs paying the minimum wage, either on a part-time basis or while they are searching for better jobs elsewhere. Put simply, the minimum wage is a blunt instrument in targeting poverty.

Where the chief income earner in a household is being paid minimum wages, for sure the income of the household is low. But the support of households in this position is not limited to the minimum wage - benefits, based on household income, kick in. These benefits are far better at targeting poverty.

Raising the minimum wage can of course help some people in poorly remunerated jobs; that's what they're there for. But it also raises the price of labour for employers. Under some circumstances this is no bad thing - it can prevent exploitation of workers in a situation where the employer has a lot of market power. But substantially to raise the minimum wage during tough economic times would most likely have deleterious effects on employment. It is a policy that would hurt the very people that Marmot is seeking to protect.

So that's that then. The UK has emerged out of recession, with growth of 0.1% in the last quarter of last year. This is not a spectacular bounce back, and the receovery is set to be fragile for some time to come. The restoration of VAT to 17.5% at the start of this year may have led some people to prepone major purchases, so there could be a downward blip in demand during the current quarter. And while political considerations have delayed the announcement of savage public expenditure cuts (and - given that the patient is still in intensive care - that is probably just as well), such cuts will surely come.

While the unemployment rate fell last month, this was surprising. Over the longer term, expect the economy to have to grow by 2-2.5% per year before seeing a sustained decline in unemployment. In light of the pressure on public finances, it could well be another two years, at least, before this is achieved.

We're out of recession, but not out of the woods.

A letter appears in today's Financial Times from 12 economists, urging the Chancellor of the Exchequer not to rush to cut government spending. I am one of the signatories.

To be sure, the government's budget deficit has risen alarmingly over the last couple of years. It has needed to do so in order to mitigate the effects of recession. And it has, beyond doubt, reached levels that, at around 15% of Gross Domestic Product, are not sustainable in the long term. But we should not forget that the deficit is a flow measure - it represents the gap between government spending and tax revenues in just one year. If we live beyond our means year after year, then that is not good; but if we save in some years in order to spend in difficult times, then that is not bad. At the moment, things are difficult, and thanks to some fairly prudent housekeeping in years gone by (not as prudent as it might have been perhaps - but still prudent enough) the national debt - the relevant stock measure - remains fairly modest. To be precise, the national debt in the UK (according to the latest OECD estimates) amounts to around 75% of Gross Domestic Product - less than that in the Euro area, less than that in the United States, and considerably less than that in Japan.

The government will need to tackle the budget deficit at some stage, and it should not wait too long before doing so. But to be aggressive in doing so now would be premature. The data for the last quarter showed the UK still in recession. Other countries will be tightening their budgets and this will likely result in, at best, slow recovery of global demand. So any recovery in the UK will be fragile over the coming year. If spending cuts were to throw the economy back into reverse, tax revenues would fall further, thus exacerbating - not curing - the problem of a high budget deficit.

Perhaps the foot should come off the accelerator a little. But it's too early to slam it on the brake. Like good comedy, it's just a matter of... timing.

A couple of news snippets from America have thrown the markets into reverse. House sales slowed by 3.6% over the year to September, and a measure of consumer confidence has also slipped. This news closely follows other disappointing news about US retail sales - though the latter figures are distorted somewhat by the ending of the car scrappage scheme in September.

The news from across the pond serves as a warning that - while the worst of the recession may be over - the route back to sustained growth is likely to be long and difficult. We knew that already. A look at the long term trend suggests that the markets are not currently overvalued, and that the current blip should not represent the start of a more prolonged decline.

In a Guardian article over the weekend, David Blanchflower has argued that 'a few years of inflation, around 5% or so, would be a really good idea'. It is certainly the case that inflation could help reduce the national debt and so improve the public finances - simply because it would reduce the real value of that debt. That being the case, it is almost certainly part of the hidden agenda for all political parties as we run up to the next election.

However, inflation hits some people harder than others. In particular it hits those on fixed incomes (which are often low incomes) - people like pensioners. To advocate a deliberate stimulus of inflation will be regarded by many observers as bizzare, at least without introducing special protection for disadvantaged groups. This means indexation of pensions. How effective a policy of inflation would then be is uncertain. The long and short of it is that the current situation demands that people feel pain in the adjustment.

Prof Blanchflower has done us all a service in bringing what are surely hidden agendas out into the open. Whether he is right in judging inflation to be a 'really good idea' is moot. But it is certainly right that we should have the opportunity to discuss these things in the open.

The Confederation of British Industry has generated some controversy with its report higher education. It advocates increased tuition fees, temporary abandonment of the target that 50% of the cohort should benefit from higher education, more financial support from business, and increased support for the STEM (schience, technology, engineering and mathematics) subject areas. These are not straightforward proposals.

Increasing tuition fees certainly sounds like an appealing way of maintaining funding for the universities at a time when the public finances are going to be squeezed. But the way in which students are funded in the UK make this option less simple to implement than might appear at first glance. Students receive a loan from the Student Loans Company, out of which they pay their tuition fees. These loans are funded by government. To be sure, the government can package these loans up and sell them to the private sector as parcels of debt - financial institutions are happy to pay upfront for an asset that will yield them returns in the future. But these parcels have to be sold at a discount. This discount reflects the fact that not all of what is loaned to students ends up being repaid - students on low incomes do not make repayments, and there is a write-off of the debt after 25 years. So, even though an increase in tuition fees might lead to a reduction in the amount of money that government needs to give directly to the universities, it would also lead to an increase in the amount of government expenditure needed to fund the student loan system. The extent to which tuition fees could be raised therefore entails a rather delicate balancing act. The Institute for Fiscal Studies has done interesting work on this. Some increase in tuition fees would certainly be possible. But the extent to which this could be done without entailing additional government expenditure is more limited than some commentators would appear to think.

The 50% target has always been contentious - not least because the figure itself appears to have been plucked out of thin air. It might reasonably be argued that, rather than have a target, young people should be allowed to make their own decisions about whether or not higher education represents, for them, a good investment. This year, many thousands of qualified school leavers have not succeeded in finding places in higher education. Abandonment of the target now would appear to be perverse.

It is not new for there to be calls for businesses to provide financial support to higher education. Many people agree that they should, but this does not, of course, mean that they will. Workers are not, in general, bound to their employers - we do not live in a slavery society. This means that workers are mobile across firms, which in turn means that firms are reluctant to pay for workers’ general education – they have no guarantee that the worker will stay with the firm long enough to give the company a return on its investment in that education.

The STEM subjects have been prioritised by government in recent years. There are, however, other subjects – notably business and law - that equally offer students a high rate of return.

While the CBI proposals are to be welcomed in that they will encourage debate, one would hope that the debate that is to follow will recognise some of the nuances that the proposals themselves fail to appreciate.

The National Institute for Economic Research estimates that the UK economy grew in the three months to the end of August this year. Official data will not be released until later in the year, and will cover the three months to September.

Meanwhile the FTSE index has risen above 5000 and appears - for now at least - to be staying there, giving further cause for optimism.

If these indicators are to be trusted, it would suggest that the recession has been quite short - five quarters - but also quite sharp. The rapid return to growth has surely been helped by the aggressive policy response of governments around the world. But that response in itself - desirable though it has been - has compromised the ability of economies to recover rapidly. The gulf that has emerged between public spending and tax revenues in this recession means that fiscal tightening over the next few years is inevitable. That tightening will constrain the growth of the economy in exactly the same way as the recent expansion of the budget deficit has stimulated it. The recession may be over, but the aftermath will be with us for several years to come.

The OECD has published the latest in its series of reports, Education at a Glance. This highlights the substantial rate of return to higher education in all OECD countries, and strongly argues the case for further investment in students' education, particularly as a means of ensuring that countries emerge out of recession with a labour force that is as strongly equipped as possible. This echoes the case made several months ago by David Bell and David Blanchflower.

Governments have been aggressive in their policy response to the current recession, and the impact of this will be felt for years to come in the form of a squeeze on public finances. But education has considerable appeal at times like these: we invest in young people's skills rather than let them depreciate through lack of use; we avoid the scarring effects of unemployment which can blight whole careers; we ensure that aggregate demand is stimulated, but also - crucial in the long run - aggregate supply is boosted, as the productive capacity of the economy is enhanced through education.

Shaping a Fairer Future is an update from the Women and Work Commission about progress in securing gender equality in the UK. The crude gender pay gap has risen slightly since 2007, to 23 per cent - while this is an unsatisfactory measure in that it makes no allowance for differences in experience or other characteristics, the direction of change remains a source of concern.

The report points to gender stereotyping at early ages and failures to secure a satisfactory work-life balance as two major areas where change is needed. It notes some areas of progress since the Commission's earlier report three years ago, but at the same time laments the fact that recommendations made at that time have not been followed up.

While much of the new report is to be commended, some of its recommendations appear underdeveloped. For example, recommendation 34 urges the Department for Children Schools and Families to consider 'what more can be done to increase the wages of childcare workers, many of whom receive low/minimum wage, while ensuring that childcare costs remain affordable'. This is very worthy, but wages are of course determined primarily by the forces of demand and supply - as indeed are childcare costs. If this recommendation is a veiled call for subsidies, perhaps, in the current economic climate, the Commission should apply a rather brutal reality check.

Gross Domestic Product (GDP) continues to fall keeping the economy in recession. The latest figures show that GDP fell by 0.8% in the second quarter of 2009 - suggesting that the optimistic monthly estimates for April and May that had been produced by NIESR (and discussed earlier on this blog) were biased up. This is the fifth quarter of the recession. While the decline in output in the second quarter is certainly more modest than in the first quarter of this year, it still looks as though it will be the end of this year before the recession ends. And it will be many (18-24, possibly more) months later before unemployment starts to ease.

On the not-so-dismal side, retail sales have bounced back over the last month or so, and the housing market continues to show some signs of recovery with increased sales (albeit at depressed prices).

We may be past the trough, but there is still some way to go before we can say that output is rising and the recovery is properly under way.

The Chancellor of the Exchequer has announced plans to reform the regulation of the banking system in the wake of the financial crisis. The plans involve:

(i) capital asset requirements for banks, in the form of minimum required ratios that will vary according to the riskiness of activity
(ii) an enhanced regulatory role for the Financial Services Authority (FSA), and special focus on the activities of key banks
(iii) curbing the tendency for banks to take excessive risks, by devising a code that will regulate banks' remuneration practices
(iv) improved systems of corporate governance

As far as they go, the plans are good. One might quibble about whether certain functions are better carried out by the FSA or the Bank of England - but that is a secondary quibble. A more major concern, however, is that these reforms fail to tackle the problem that was at the very heart of the crisis - that of hidden information. Capital assets ratios can be enforced if the regulator knows all about a bank's transactions; risk-taking can be curbed if the regulator knows all about the risks that are being taken. But if there is latent information, the fundamental problems remain.

The economic theory of principal and agent shows that it is possible to design incentive schemes that ensure that agents (in this case, banks) behave in a way that is compatible with the interests of the principal (in this case, the regulator) even when the agents have information that is not revealed to the principal. Smart reform of the banking system should focus more on the design of such incentives, and be less trusting about the extent to which banks will be prepared to reveal all.

In a nutshell, the proposals are a good start, but they betray a naivete that, in the wake of the events of the last two years, is a little surprising. The plans should go further.

The National Institute for Economic and Social Research (NIESR) has released its latest estimates of monthly GDP for the UK. These suggest that GDP has grown in each of the last two months, and that the trough of the recession was in March of this year.

NIESR has a good track record, and its estimates deserve to be taken seriously. This being the case, the news is very encouraging. Indeed, it would mean that the recession has been unusually short, in spite of the severity of the downturn in the last quarter of 2008 and first quarter of 2009.

My expectation has been that we would start to see a recovery in the last quarter of this year or the first quarter of next. It would be nice to be proved wrong if it were to mean that recovery comes sooner than I expected. But there is still room for caution. Recessions do usually last longer than three or four quarters. And in any event, the recovery in output growth typically leads recovery in the labour market by up to two years. So, unfortunately, unemployment is still set to rise for a while to come.

Barry Eichengreen and Kevin O'Rourke have recently provided comparisons of the current state of the global economy and that which prevailed in 1929. Their early comparisons generated some alarm in that the pattern of the Great Depression seemed to be replicated in the current data. The most recent update suggests that there is now room for cautious optimism. Over the last couple of months, the decline in world economic output has slowed, suggesting the possibility that we may be near a turning point. Stock markets have also recovered somewhat over that period.

There is further reason for this optimism. The policy response has been much more aggressive this time around. Using a 7 country average, Eichengreen and O'Rourke show that interest rates are now close to zero, while in the 1929 crisis they remained at around 4 per cent.

While the overall outlook is starting to improve, there are some countries where the immediate prospects still look very bleak. Output is still falling rapidly in Italy and France, for example. It is still some weeks before we shall see the official UK data for the second quarter of 2009 - we shall all await those with interest.

The OECD's leading indicators have been published this week, and show a little bit of encouraging news. The series, which were plummeting downwards after falling off a cliff in the early part of last year, have shown some signs of recovery in several countries. In the UK, there is indication that the bottom of the trough in the series may have been passed. It is still early days.

Today's budget presents the Chancellor, Alistair Darling, with a tough challenge. The immediate prospects for the economy remain poor, and further stimulus would be welcome - so long as it can be concentrated in areas where the impact will be instantaneous. The recession, alongside the bailouts of the banks, is taking a toll on the public finances, though - tax revenues fall as the national income is reduced, while at the same time government spending on benefits increases. The scale of the hit on the public purse is such that the markets need reassurance that plans are in place for the government to repay what it is borrowing. The problem for the Chancellor is that the more reassurance he gives, the more likely people are to curtail their current spending in anticipation of future tax rises and spending cuts, and so the harder it will be to ensure a healthy recovery. That's a difficult tightrope to walk.

Things have been made easier for the Chancellor - but not necessarily for the country as a whole - by the failure of the G20 to agree a coordinated fiscal stimulus. It makes little sense for the UK to go it alone on this (any more than it has done so already). Much of any extra spending would likely spill out of the domestic economy. Hence, for example, the much mooted deal for the car industry - giving discounts on new cars to people who scrap old ones - would involve the British taxpayer in subsidising foreign car manufacturers; while the policy would no doubt help car dealers, parts manufacturers, and other firms in this country, it still does not look like smart policy. Proposals to stimulate construction (which does not involve such leakages out of the domestic economy) look like a better bet. But they need to be implemented quickly.

There are mixed signals about the state of the housing market this week, in reports from the Nationwide and Halifax. Nationwide shows a slight increase in house prices during March, while Halifax indicates that prices continued to fall.

A graph of the two series of statistics together appears to show that the downturn in house price inflation - as measured year on year - is bottoming out. But while the curve lies below zero, prices remain lower than at the same time last year.

Other recent statistics, released by the Bank of England, show that the number of mortgage approvals for house purchases increased quite sharply in February, albeit from horribly low levels. It is probably too early to talk of green shoots, but in the housing market the dead leaves are now falling less thickly.

The G20 London summit has closed. The world leaders have achieved agreement on some, but not all, of the issues on the agenda.

The summit subscribed to sound principles for the reform of the banking system, broadening the scope of regulation to include the credit rating agencies and hedge funds, removing conflicts of interest, adopting international standards, and regulating bonuses. The leaders also committed to a common global approach to tackling the problem of toxic assets.

Over $1000 billion will be committed by the G20 to support international agencies such as the International Monetary Fund (IMF) and World Bank. In turn, the IMF will increase its allocation of Special Drawing Rights (SDRs) to its members by up to $250 billion. SDRs were created in the late 1960s as an alternative asset to gold and the US dollar. This is the first time an increased allocation of SDRs has been made since 1981, and it represents a means of increasing liquidity at an international level in much the same way as quantitative easing increases liquidity in a domestic economy. This relaxation by the IMF is likely to be particularly helpful to middle income countries that are big enough to have reserves at the IMF yet not so big that they have been able to put major quantitative easing programmes of their own in place.

The rhetoric is anti-protectionist. Good - protectionism would be hugely damaging to the efficiency of the global economy, and would throw into reverse the fantastic gains that have been made in alleviating poverty, particularly in the developing world, over the last 20 years. But, here at least, we know that the reality is diverging from the rhetoric - a recent VOX publication demonstrates that trade has collapsed dramatically in the wake of increased insidious protectionism. The rhetoric needs to win out, and the moves toward back-door protectionism strongly resisted. The summit resolved to support trade by injecting $250 billion of trade finance to be made available through the development banks, the World Bank, and other international agencies. It also resolved to ask the IMF to use the proceeds of gold sales to help the poorest countries.

There has been no agreement to co-ordinate a further fiscal stimulus, though there was an anodyne statement that the governments would 'do what it takes to restore global growth' and that a global stimulus of $5000 billion has already taken place. In the absence of this, any major further unilateral stimulus from the UK government is now unlikely, especially in the form of further tax cuts - the benefits of these would too readily leak out of the domestic economy. This news is a mixed blessing - the public finances are weak, but a coordinated stimulus would have been very welcome. There has been mention of investment in green projects, and this seems to be an area where countries will each work things out their own way. Let's wait and see what happens in the budget later this month.

The summit represents a political as well as an economic watershed in that some rapidly developing countries - notably China - will contribute more to international agencies, and so will gain considerably more voice. At the same time, the international agencies will increase their surveillance of the world economy.

Overall this represents a mixed outcome. The G20 will meet again later this year. By then it may be clearer where the world economy is headed, and we will know more about how desirable an extra fiscal stimulus might have been. The extent to which, amongst the countries that make up the G20, the response is as coordinated as the rhetoric will also, by then, be clearer.

The plot is straightforward. Britain and the US want a coordinated fiscal stimulus package. Meanwhile France and Germany want reform of the regulatory system for the financial sector. In truth no-one would disagree with them, but they are promoting the idea of regulation as a smokescreen that can hide their opposition to what they brand as the 'Anglo-Saxon' calls for further fiscal expansion.

The reality is that the world needs both regulatory reform and fiscal stimulus. The G20 summit in London is likely to provide the first, and we need to wait and see whether it will deliver on the second. Sarkozy and Merkel need to act tough to impress their domestic audiences, and it is not clear how closely matched their rhetoric will be to their actions. The hype is that the crisis started, and so needs to be solved, in countries other than their own. But they must surely know that, in an integrated world, blame is really irrelevant to the solution. And solution, now more than ever, requires co-ordinated response.

Lord Turner, chair of the Financial Services Authority (FSA), has today published his review of bank regulation. He was asked to produce this review by the Chancellor of the Exchequer in the wake of the banking crisis.

He recommends that banks should be required to hold more of their assets in the form of reserves, building up these reserves during prosperous times, so that they are not engaging in excessive lending that can result in cash flow problems. The recent policy has been to allow banks to make their own judgements about their levels of reserves - and many, seduced by the returns that are available from more profitable investments, have been caught out by allowing their reserves to fall too low. So this proposal is really about protecting banks from themselves. The proposal goes much further than stipulating a reserve assets ratio, as it drills down into the detail of banks' balance sheets.

Lord Turner raises the possibility that, to promote cautious lending, limits (dependent on the borrower's income) should be placed on the amounts that can be offered as mortgage loans. He also recommends that banks should be required to publish data on the risks that they are undertaking when making investments. It is difficult to see how this can be operationalised other than through a reliance on credit ratings - which are themselves now largely discredited and in need of reform. The Turner report proposes such reforms.

The report also states that, while the FSA has, in the past, taken the view that the market is right and that decisions made by banks in response to market forces are good decisions, it will in future question that view; in so doing it will become a more challenging regulator for the banks to work with. This has to be a good thing.

The report addresses also the bonus culture that has existed in financial institutions, and makes a sound recommendation that payment of bonuses should be deferred in order to ensure that workers' behaviour serves the long term interests of the bank.

Throughout the report, the emphasis is on securing international agreement and adherence to the reforms wherever possible.

But the key to the success of all of the above proposals is the quality of information that banks are required to provide. Auditing of this information will need to be robust, with severe penalties for misrepresentation. We have learned a lot about the power of hidden information over the last couple of years, and we have learned about how easily information can be concealed from view. Now we need to learn about how to flush it out. Lord Turner's report is a very welcome step in the right direction.

The International Monetary Fund (IMF) has revised downwards its growth forecasts for the UK economy over the next couple of years, and now expects overall negative growth in 2010 as well as 2009. While there is certainly a possibility of deflation and prolonged recession, my judgement would be that this remains a possibility rather than a likelihood. In particular, the introduction of quantitative easing should make falling prices less likely. The IMF forecasts therefore look pessimistic. It is perhaps worth noting that the IMF will not publish these forecasts until the end of April, as part of their World Economic Outlook series. Much can change between now and then.

Unemployment in the UK has risen above 2 million as the recession continues to bite. News on this front will get worse, probably much worse, before it starts to get better. Recessions tend to be fairly short lived affairs, and so growth should resume within the next year or so. But it takes more than a little growth to stem the rise in unemployment. Owing to the impact of technological change on productivity, the growth rate of real output in the UK needs to be about 2.5% per year in order to keep unemployment from rising. So we can expect the unemployment rate to rise for quite a while yet. Indeed, while the typical duration of a recession as measured by the period over which GDP growth is negative is about 18 months, it is typically the case that the unemployment rate rises for a further 2 or 3 years after the recession ends.

A new debate has opened about university tuition fees in the UK. A survey of vice chancellors indicates that most are in favour of a substantial rise in the upper limit on tuition fees, currently set at £3145 per year for UK domiciled undergraduates.

This might appear to be quite a simple question of striking a balance between public and private contributions to the cost of higher education. The reality is somewhat more subtle. Current practice is for the government to bundle student loans together and sells the debt to private sector investors - this debt is sold at a discount in order to reflect the fact that not all of the amount owed by students will be repaid. For example, if a graduate has any debt outstanding 25 years after graduating, then that debt is written off. As things stand, the discount is not huge, but raising tuition fees would inevitably lead to an increase in the debt that is not repaid - and hence would require the government to sell this debt off at a more substantial discount.

Put simply, raising tuition fees would raise the government's own commitment to spend on higher education. Removing the cap on tuition fees altogether would require the government to sign a blank cheque.

There are several potential fixes to this dilemma, none of them very pleasant. The rate of repayment of the loan could be raised above the current level (which is 9% of all income above a disregard). The interest rate subsidy on loans could be reduced or scrapped altogether. Loans to cover tuition fees could be limited to (say) £3145, and students would have to fund the gap between this and actual tuition fees - perhaps by taking out commercial bank loans or by way of parental donations. Another alternative would be to convert the current system into a fully fledged graduate tax, whereby graduates pay a higher rate of income tax than other workers, with no upper limit on the amount of repayment of the cost of higher education.

It is inevitable that universities, nervous about their prospects for continued government funding once the economic crisis is over, should wish to explore other avenues. The problem is that any attempt to shift more of the costs onto graduates would have to be very cleverly engineered in order to avoid imposing substantially greater costs also on the taxpayer.

The Bank of England has once again cut its interest rate, this time to 0.5%. Significantly, the cut has been accompanied by an announcement that the Bank will engage in quantitative easing (QE) in order to render less likely the chances of inflation turning negative later this year. Such deflation would be extremely harmful to the prospects of economic recovery, since demand would collapse as people postpone nonessential purchases in order to take advantage of falling prices.

QE is likely, initially at least, to operate via the Bank's usual mechanisms - the new money will be released into the economy as the Bank purchases bonds and other securities from the commercial banks. The commercial banks would then hold more of their assets in the form of money, which they would then be able to lend to businesses or prospective house purchasers and consumers.

On 22 April, the budget will be announced. By then, it may become clear that QE could be used in order to finance a fiscal expansion. This, so long as it is concentrated on 'shovel-ready', quick win projects is also desirable under the present circumstances.

Some other recent announcements also give cause to think that we are now moving in the right direction. Yesterday it was announced that BT would invest £1.5 billion in fibre optic cabling. The company had been holding back on this investment in the fear that regulation would prevent it from reaping the rewards of its investment. But the regulator, Ofcom, has now guaranteed that there will be no regulatory intervention for superfast broadband, thereby clearing the way for this substantial private sector investment project to be kick-started.

Another recent announcement guarantees the future of Private Finance Initiative (PFI) projects that had been put under threat because of difficulties faced by private sector firms in securing funding from the financial institutions. The government is prepared to make direct loans in these circumstances. This is a vitally important decision because many such projects are already underway, and offer some of the most 'shovel-ready' opportunities for investment.

In this context, it is perhaps surprising to see that the opportunity for a significant capital investment in the further education sector has been pushed back. Hopefully this missed opportunity can be recovered at the time of the budget.

Northern Rock is to offer £5 billion of new mortgage loans this year, with a further £9 billion to come over period to 2011. The funding for this move comes partly from government (though much comes from repayments and deposits that have come in to the bank). It had originally been intended that the bank would not issue new mortgages, so this represents a major attempt to inject new resource into the housing market. As such the move is very welcome.

The housing market is not the only one in which credit has been constrained, though. Businesses need loans too, and action is still needed to ensure that they have access to funds. Many of the finer details of the second banking bailout will be published later this week, and hopefully there will be some relief for businesses there.

Casey Mulligan has produced a provocative article which suggests that the recession in the US is driven by supply side factors. I have repeated his exercise for the UK, and find that the recession in this country is very much driven by demand factors. Between the last quarter of 2007 and the last quarter of 2008, the fall in employment was very marginal - just 0.1%. The fall in productivity over this period was relatively large, however, at 0.7%. Unsurprisingly in the context of global slowdown, the demand curve for labour has shifted down.

Recent movements in the three month London Inter-Bank Official Rate (LIBOR) give renewed cause for concern that things are not improving in the banking market.

In normal times, the LIBOR settles at around 0.1 or 0.2 percentage points above the base rate, but in the first half of last year it has rose well above that, indicating high levels of fear in the banking sector. At its peak, the gap amounted to a massive 1.3 percentage points.

From the middle of last year till January of this year, the gap narrowed, albeit at a sluggish pace. Before the January change in the base rate, LIBOR had fallen to less than 0.6 percentage points of the base rate. It seemed that, slowly but surely, normality was returning. Since then, however, the gap has widened again, and little of the most recent cut in base rate has fed through into cuts in LIBOR. The LIBOR currently stands at 2.06%, more than 1 percentage point above the central bank's base rate. And yesterday, the LIBOR actually rose slightly, indicating that any significant further convergence with the base rate is unlikely at least in the short term.

Recovery from recession cannot begin until the financial markets are operating at something approaching normality. The evidence provided by the recent behaviour of LIBOR suggests that there is still, even after the bailouts, a considerable amount of anxiety in these markets. In the presence of that anxiety, the banks will remain reluctant to lend, and investment cannot therefore be relied upon to provide the economy with the stimulus it needs. The situation is perhaps exacerbated by the revelation of the extent of losses at HBOS, and the impact that this has on the merged Lloyds/HBOS group. The sooner we can establish what further help this group needs from the public purse, and the sooner that that help is guaranteed, the better.

The Confederation for British Industry has published its latest set of forecasts for the UK economy. They make gloomy reading, with GDP expected to fall by 3.3% over the course of 2009. The recession is expected to end in the first quarter of next year, but with growth in 2010 being extremely slow. Over the 6 quarters of recession, the CBI expect output to fall by a total of 4.5% - this would put the severity of the recession somewhere between the recessions of the early 1980s and the early 1990s.

These forecasts look about right. By the middle of this year, the benefits of reduced interest rate, the fall in the value of sterling, and the dramatic decrease in fuel costs will all have started to take hold. In addition, any fiscal stimulus aimed at shovel-ready projects should be in place. While being very plausible, the global nature of the current recession means that what happens in the UK depends crucially on what happens elsewhere, and, this being the case, any forecasts must be made in a very uncertain environment.

A striking feature of the CBI forecast is the prediction that the rate of inflation, as measured by the consumer price index, will dip slightly below zero in the third quarter of this year. The CBI expects this deflation to be very mild and temporary, not least because VAT is due to rise back to its previous level of 17.5% in the fourth quarter.

An interesting angle on the debate about whether the Bank of England should now engage in 'quantitative easing' (QE) - in effect printing money - is provided by a comparison with experience in Japan.

One of the difficulties with QE is that releasing more money into the economy does not necessarily mean that that money will be used. At a time of very low inflation, people might wait for the real prices of goods and services to drop before spending. So the extra balances of money just lie idle, and fail to stimulate economic activity. In 1999, Japan tried to finesse this problem by way of an innovative form of QE - they issued time-limited shopping vouchers to members of the public (children and some old people). The fact that these vouchers carried an end-date meant that people could not wait long before spending them - and so the economy should experience an instantaneous stimulus.

In a fascinating paper, Masahiro Hori and co-authors find that this experiment did indeed lead to an increase in economic activity in the short run. Over a longer period, the vouchers displaced other spending that would have taken place, though, so that the longer term impact of the scheme was limited. In effect, the scheme encouraged people to prepone their consumption.

There is much that can be learned about QE from this experience. A crucial issue concerns the way in which it is phased - if QE has an immediate impact, but one which wears off quickly, achieving a more sustained impact over the duration of the recession will likely require a sequence of voucher (or new money) issues.

The latest house price data from Halifax points to a slight rise in prices over the most recent month. This goes against the expectations of many commentators. But I have consistently argued that the necessary downward adjustment in house prices is more likely to be realised partly by way of a slow recovery from a more modest price fall than that predicted by more pessimistic observers. See for example my blog entry of 28 August last year.

The correction has some way to go and it is far too early to suggest that house prices have bottomed out. If they have, then that is good news. But the good news has to be qualified by the observation that prices are unlikely to rise by much for a good few years yet.

The Bank of England has again cut the interest rate, this time to 1 per cent. With very low interest rates, concerns arise that the economy may have entered a 'liquidity trap'. This occurs when commercial banks, faced by a low return, become unwilling to lend money that is made available to them through the operations of the central bank. It can also occur when interest rates are so low that individuals and firms prefer to hold idle balances of money, rather than deposit them in the banking system where they could be recycled in the form of loans and thus create new demand. When there is a liquidity trap, further cuts in interest rates fail to stimulate the economy, simply because they do not lead to more money being released into the economy. The money is 'trapped' in the banking system (or under people's mattresses), and is therefore ineffective in raising the level of demand for goods and services.

In such circumstances the authorities are, in effect, denied the use of a major (and, in recent years, the major) tool of economic policy. There remain other levers of policy that can and should be used, however. Fiscal policy should be especially effective during such times, although many commentators have concerns about how long government spending policies take to have their full effect. There is therefore now a desperate need for a large fiscal stimulus in the UK. This should be focused primarily on spending projects that can be implemented quickly and tax cuts that put extra disposable income into the hands of those most likely to spend. The package should ideally be part of a coordinated international policy effort. Of course, the VAT cut was a nod in the direction of fiscal expansion (and, for reasons I have alluded to before, not a particularly effective one) - but what is now clearly needed is a much bigger stimulus, along the lines of the recently announced US package.

Another lever is for the central bank directly to increase the supply of money. Typically this is done by purchasing government securities from the commercial banks, so that these banks have more money. Under some circumstances this might have little effect - the banks have simply swapped low interest securities for zero interest money. But if, by raising the money supply, the central bank can persuade commercial banks that inflation might rise in future, the commercial banks may become more keen to lend out their extra money balances, and hence the liquidity trap can be finessed. This is known as 'quantitative easing' (QE). Whether QE can be effective in the current situation is moot - inflation does not at present seem to be even the remotest threat. But, that being the case, it is at least likely that QE could do no harm, and might even do a little good.

In sum, we are reaching the point where further cuts in the interest rate are futile. Other policy levers, including QE and, especially, fiscal policy now have to come into play in a much bigger way than heretofore.

New measures to support the banks have been announced today by the government. A key component of these is the creation of a system whereby, for a fee, the government insures banks against bad debts. This requires the banks to declare and agree with the government the sums that they expect to lose from existing debts. As a quid pro quo, the banks will be required to guarantee that they will increase lending to businesses and individuals.

Any support that encourages the banking system to return to normal lending is welcome. However, the success of these measures will depend crucially on how effectively they flush out hidden information. It is not at all clear how the authorities will incentivise the banks to come clean about the true scale of bad debts. In the absence of this information, there is a sense of floundering.

Today's announcement of government support to small businesses is welcome. The support takes the form of insurance which will protect banks making loans to small and medium sized businesses, and will pay out in the event that the businesses are unable to repay their loans. The amount of government funding that is being committed to this scheme, at £20 billion, is likely, however, to be too small to meet the need, and the scheme will therefore need to be expanded pretty soon if it is to be successful.

The new policy attacks one of the problems facing small firms - access to credit to finance investment. There are, however, other problems. Many small businesses find that, as recession grips the world economy, demand for their output is depressed. This is a problem that requires a different solution - and it is not a solution that one country alone can provide. Various countries independently are now considering a substantial fiscal stimulus. Coordinated action would be to all countries' benefit.

The latest monthly estimates of GDP growth from the National Institute of Economic and Social Research indicate that growth in the last quarter of 2008 was -1.5%. This represents a truly alarming slump in economic activity - one that calls for urgent and very substantial fiscal injection.

The Bank of England has reduced its official bank rate of interest to 1.5%, a cut of half of one percentage point. This follows several dramatic cuts in the last few months of last year, and reflects a continuing perception that further stimulus is needed to reinvigorate the economy.

That perception is, of course, right. The economy is stagnating although the traditional levers of policy have already been pulled in an attempt to mitigate the worst effects of the downturn. One is certainly tempted to ask whether the traditional tools of policy, not least important of which is the interest rate are broken. This is a question that I have asked on this blog before - if banks are rationing lending, perhaps the price of credit is not so important. Perhaps government should intervene directly to stipulate that banks, at least those in which it has taken a large financial stake on the public's behalf, should lend a prescribed minimum of their assets.

This is an important question, but it is just that - a question. Policy takes time to take effect. It is still far too early to conclude that the interest rate cuts of recent months have not been effective. Indeed, given the lags that are inherent in the macroeconomic system, we would need to wait till the middle of this year before we can even begin to reach such a conclusion.

Unfortunately the economic situation is serious enough to make policymakers impatient for the answer. For that reason, there is now more and more talk of alternative policy instruments - including direct government intervention in bank lending. As the interest rate heads towards zero (1.5% is the lowest it has ever been), consideration of the alternatives inevitably comes to the fore.

Leader of the Opposition, David Cameron, has today called for taxes on savings to be scrapped. The cost of this would be borne in the form of lower public spending.

This seems a curious response to the current economic situation. The savings ratio rose steadily through last year, no doubt helped by the gap that has opened up between interest rates on the high street and the Bank of England's rate. There may indeed be a case for the interest on savings to be taxed at a higher rate than at present, with the revenues of such a tax hike being used to subsidise high interest payments on business loans. Likewise the proposal to reduce public spending seems perverse. During a recession, this would be destabilising. As I argued in this blog on 25 November last year, there are reasons to think that the government's handling of the present situation - and in particular the VAT cut - has not been particularly smart. But Mr Cameron's response seems to offer the worst of all possible worlds.

Unemployment has risen sharply, with the government's favoured (ILO) measure rising by 137000 this month. The claimant count measure has now risen above a million. These figures indicate that the recession is already hitting the labour market with some force. With the closure of large employers (such as Woolworths) anticipated over the next month, things are set to get worse before they get better.

On the preferred measure, unemployment remains below 2 million. But there is little doubt that it will rise towards 3 million over the coming year. And the rise in unemployment will not end once the recession is over - typically we need growth of about 2.5% per year in order to keep unemployment stable. This means that unemployment is set to rise well into 2010, and possibly beyond.

There are some bits of good news, though these are few and far apart. Both monetary and fiscal policy is going in the right direction, and the fall in the value of sterling makes our exports more competitive. Yet demand from overseas is weakening as the rest of the world faces recession too, so even the little good news that we have has to be qualified.

The US Federal Reserve has cut its interest rate target to virtually zero. This exhausts its ability to use this instrument as a means of kick-starting the economy. Policy makers will need to think outside the box if they are to find a way of providing further monetary stimulus.

Meanwhile rates of interest that banks are offering savers, and charging borrowers, remain relatively high. Savers in the US can, with not much shopping around, still get 2.5% or more. Borrowing is relatively costly still, and it is hard to find rates much less than 7%. If banks will not themselves bring these rates down, perhaps there is scope for government to tax interest on savings in order to subsidise borrowing.

The European parliament has voted to end the UK's opt-out on the 48 hour limit to the working week. The new regulations, limiting the length of the work week, are set to come into force by the end of 2011.

A widely held misconception is that limiting the length of the working week will ensure that work can be spread around more evenly, and so will result in a reduction in unemployment. Economists refer to this as the 'lump of labour fallacy' - the idea is that there is only a fixed amount of work to be done by however many people. In truth it is not the case that there is only so much work to go around. Attempts to reduce unemployment by limiting working hours have typically been ill-fated - the experience of France between 2000 and 2005 is a recent example. There, the working week was limited to 35 hours. Popular in some quarters, the policy was scrapped because it had no impact at all on unemployment.

A positive aspect of the limit to the working week is that it can prevent employers from demanding more hours from their workers than the latter would ideally wish to supply. This is likely to be a problem in areas where alternative employment opportunities are limited. On a crowded island with good communications and a culture of commuting, it is unlikely that many people are affected by this. But those that are are likely to be disproportionately drawn from the disadvantaged groups.

Barack Obama has promised help for the US auto industry. The banks, of course, have already received substantial sums of money from the taxpayer. They have come close to collapse because of misjudgements made in connection with bundled packages of debts. They are a special case in that the rest of the economy cannot operate without them.

The case of the car manufacturers is somewhat different. Their predicament comes from a different source - healthy competition from abroad. And the predicament itself suggests that the rest of the economy is choosing to live, and live very comfortably, with cars supplied by other producers.

While the US car industry employs large numbers of people and certain areas would be hit hard if the industry were to vanish, supporting the industry would likely only prolong the inevitable. It has, ultimately, to face up to what the UK faced up to in the 1980s - it's a tough medicine, but it's one that has to be swallowed. Obama is vague about strings that would be attached to any rescue package, and so it is difficult to come to a definitive judgement at this stage - but it looks as though it could be his first bad call.

The London Inter-Bank Offered Rate (LIBOR) of interest on 3 month loans has fallen following yesterday's cut in the Bank of England's interest rate. But while the Bank's interest rate was cut by a full percentage point, the LIBOR has only fallen from 3.72% to 3.38%. This is important because the premium of LIBOR over the Bank's rate is seen as a measure of the risk that banks perceive in lending to one another - and hence of the general inertia in the banking system.

Following the November cut in the Bank's interest rate, LIBOR fell. This fall was gradual, and it took two weeks for the premium of LIBOR over the Bank rate to come down to the level it had been at before the cut. Some commentators have suggested that the relatively modest fall in LIBOR today suggests that it will not fall much further until the new year. They argue that, over the festive period, banks will prefer to hold on to their cash reserves rather than lend. But that simply has not been the experience of the past.

I would expect to see the time path for LIBOR following the most recent cut in the Bank's rate to be quite similar to that which we saw in November. If it does not fall in this way, then we should worry - after all, a cut in the Bank's rate of interest does not, of itself, indicate any increase in the risk attached to interbank lending.

The Bank of England's Monetary Policy Committee (MPC) has reduced its interest rate by a further 1 percentage point. The rate now stands at just 2 per cent. The cut has been widely welcomed, though many commentators are suggesting that there should be a further 0.5 percentage point cut in January. One wonders: why wait?

Lags in the system mean that interest rate changes take several months to impact on the economy. We know that the patient needs treatment now and will still be desperately sick half way through next year. But the longer further interest rate cuts are delayed, the more we run the risk that they will impact on the economy at just the wrong time - after inflation has bottomed out.

The MPC (well, most members) appeared to be desperately slow in coming to an appreciation of the seriousness of the economic situation. Hopefully, over the year that is to come, the committee will do somewhat better than in the past when it comes to reading the writing on the wall.

I usually find it hard to disagree with the BBC business correspondent, Robert Peston. But there's always a first time.

The Royal Bank of Scotland (RBS) has announced that it will delay taking action to repossess the houses of people whose mortgages fall into arrears. Instead of repossessing at 3 months, they will repossess at 6 months. This is, I think, good news, and is a sensible response by a bank that is keen to look after its own investments. The fact that people fall into arrears now does not mean that they will not be able to repay in, say, a year's time. Recessions hit people hard, but are typically short lived.

Yet Mr Peston deems this to be bad news. And why? Because if there are fewer repossessions, there will be less downward pressure on house prices, and so a recovery in house prices will take longer. He misses the fact that such a recovery would be from a lower base. And he misses the fact that it would have been bought by the unnecessary suffering of people thrown out of their homes.

The move by RBS is welcome, and it is very much to be hoped that other banks will quickly follow suit.

Following leaks, the pre-budget report held few real surprises. The big news was indeed the cut in VAT. The big concern is that this was not the best way to stimulate demand. Given what we now know about future tax increases, higher income consumers will not go out and spend in response to the slight reduction in prices brought about by the VAT cut. They will, rather, save extra in order to help them pay the extra tax burden when it comes.

A boost to the incomes of people at the bottom end of the income distribution might have proved more effective. The propensity to consume is high amongst this group, so the extra boost to income would circulate all the better around the economy. Perhaps the best way to have achieved this would have been to reduce the rate of income tax back to 10 per cent.

This leaves just the merest hint of a feeling that the government is more concerned about saving face than about implementing the most effective policy. Given the gravity of the present economic situation, surely that cannot be?

The government's pre-budget report is due out today, and its contents have been widely leaked. We can expect a reduction in the rate of VAT from 17.5% to 15%, some twiddling of tax credits, and the promise of a higher rate of tax for high income earners after the next election.

Any extra spending by government should help, especially if targeted at those at the bottom end of the labour market who are often those most likely to suffer the effects of the recession. Recessions disproportionately hit a relatively small number of people - those who are thrown out of work are hit hardest, while others whose hours of work might be restricted also feel the pinch. Extra spending on benefits for these groups, especially if time limited, should help, not least because in straitened times such groups are likely to spend a high proportion of the extra benefit.

A general cut in VAT will encourage everyone to spend more, but does not have the benefit of being targeted at the hardest hit. A cut of 2.5% may help a little, but may make relatively little inroad when stores are already offering greater discounts with apparently modest effect.

It is widely understood that the tax breaks to be offered today will come at a cost in terms of extra taxes to be paid a couple of years down the line. Something that economists call 'Ricardian equivalence' is of relevance here - tax cuts are often not as effective in stimulating the economy as one might hope, simply because people believe that they will need to be funded by tax hikes in the future. People just save the extra money they find in their pockets rather than spend it, hoping that their extra savings will help them pay the extra taxes that are to come. Now, whether this Ricardian equivalence effect will come to pass as a result of today's tax cuts is moot. But it is worth bearing in mind that tax cuts for everyone may not be as effective in stimulating the economy as would be targeted spending.

US Treasury Secretary, Henry Paulson, has announced that the $700 billion bailout of the financial sector which was passed through Congress just a few weeks ago will not, after all, be used to purchase toxic assets (derivatives comprising bad debts largely from subprime mortgages). Instead, it will be used to inject new capital into banks and other firms in the financial services sector. Some commentators have indicated that the change in plan is due to there being more toxic waste out there than anybody expected.

Perhaps so, but if so there is a silver lining in the cloud. Injection of new capital into the banks buys the government influence, maybe even control, over their future dealings.

Normally there would be no reason to expect the government to do a better job of running a firm than anyone else. But the wider impact of the financial crisis makes these exceptional times. If, by buying greater influence in the running of banks, the authorities can restore confidence and fix the lending bottlenecks that have paralysed the system, then that has to be a good thing.

The last two weeks have seen some action on the three month LIBOR. Up to nearly the end of October, this market interest rate - a crucial one, since it is the rate at which banks typically lend to one another - had been moving glacially towards the Bank of England's rate, having (unusually) risen well above the latter over the last year. It has taken some time for the government's rescue package to take effect, but there is now sign of some real progress on the LIBOR. If it continues to descend at the current rate, it will not be far above the Bank's rate by the end of this month.

That would be welcome news indeed - though the severity of the recession suggests that further steep cuts in interest rates are needed. I would expect the Bank's rate to be cut (and to be cut by more than a quarter of a percentage point) in December. Hopefully LIBOR will by then track the Bank's rate, and will respond quickly.

The Bank of England has produced new forecasts of for GDP growth and inflation which, for the first time, provide a plausible prediction for how the recession will pan out. They predict that the UK will pull out of recession in the last quarter of 2009 or the first quarter of 2010, and that the decline in GDP over the first four quarters of the recession will amount to 2%. Meanwhile, the Bank expects inflation to dip below 1% in the summer of 2010 - that is territory where the Governor of the Bank would have to write to the Chancellor of the Exchequer explaining why the inflation target of 2% is being missed - again.

The line from the Bank seems to be that things changed in August of this year, and that only then did the severity of the downturn become apparent. Thus, we are told, it was not appropriate to cut interest rates sooner. Things certainly did take a turn for the worse in August, but the fact is that there was a lot of writing on the wall before then. This recession has not been hard to predict. As long ago as the summer of 2007, I commented on this blog about predictions made by Ed Leamer about the American economy - and Leamer was not the first to sound alarm bells. Others commented on the nosedive in the ABX index of derivative prices - for poorly rated securities at the start of 2007 and even of AAA rated securities by July of that year - and they noted the implications for the real economy.

So, it would appear, some forecasting models need a review.

In the wake of yesterday's dramatic interest rate cut by the Bank of England, the LIBOR today fell, by a little more than one percentage point, to 4.49%. This is encouraging, though it still has more than a whole point left to fall before a sense of normality can return.

With LIBOR falling, more lenders should today adjust their interest rates downwards - mitigating yesterday's fears that the Bank's interest rate cut would not be passed on. The levers of monetary policy still work, despite a bit of rust in the joints.

The Bank of England has announced a massive 1.5 percentage point cut in its rate of interest. This is an attempt to stimulate the economy in the face of recession. It quickly follows the publication of the latest International Monetary Fund forecasts, which predict a 1.3% contraction in the UK economy over the coming year.

While the interest rate cut should have a positive effect, there are two caveats. First, it typically takes at least 6 months for changes in the interest rate to have a discernible impact on the overall economy. Secondly, a cut in the Bank's interest rate needs to be followed by a fall in market rates. The three month LIBOR, in particular, needs to fall. While it has been falling in recent weeks, it has been doing so far too slowly. There is still a lot of inertia and fear in the banking system. As the government's injection of capital into the system takes effect, the market interest rates should come down quite rapidly. But we still need to wait and see.

While the cut in the Bank's interest rate is dramatic in itself, it is to be hoped therefore that it will lead to an even bigger cut in the interest rates at which commercial banks lend to one another and the rates at which they lend to businesses and households.

Even so, today's cut is unlikely to be the last.

The OECD today reports that income inequality has, since 2000, declined faster in the UK than in any other member country. This gain has been largely due to a rise in employment.

In other recent work, I have investigated what the current skill set of young people in Britain implies for the distribution of income over the coming decades. For the most part, skills of young people have risen by about 7 per cent since the mid-1980s and the mid-2000s. But they have increased by much less for those in the bottom 20 per cent of the skills distribution - and there is evidence that they have declined for those in the bottom 5 per cent. These findings suggest that the distribution of income is likely to widen over the coming couple of decades, as young people enter the labour force.

While the overall improvement in skill is, of course, something to be welcomed, more still needs to be done, and urgently so, to support those in the bottom tail of the distribution.

Here is some good news. The LIBOR has started to fall. The overnight LIBOR has fallen to just 0.19 percentage points above the Bank of England's official interest rate - a week ago it was 1.3 percentage points above. The decline in the three month LIBOR is slower - this rate now stands at 6.16% - but here too there is progress. This should mean an easing of the blockages in the market for credit that we have seen in recent weeks.

Recession still looms. But at least monetary policy - a major tool for dealing with recession - once again stands some chance of working.

The London Interbank Offered Rate (LIBOR) of interest at which banks make three month loans to each other has, despite the massive bail-out programmes launched internationally over the last couple of weeks, stayed at over 2 percentage points above the Bank of England's base rate. This indicates that banks are still spectacularly unwilling to lend to each other - despite all the guarantees that government has now put in place.

With the LIBOR failing to fall much after the base rate was cut by half a percentage point last week, businesses are not encouraged to invest. Cuts in the interest rate at which the Bank of England makes overnight loans to commercial banks cannot stimulate the economy if they are not fed through to other interest rates like the LIBOR.

Fundamentally, banks are now holding on to their assets in the form of cash, rather than lending out. In the absence of confidence, this is a 'once bitten twice shy' approach - but it is not helping the economy recover.

Desperate times call for desperate measures. Perhaps we need to think once more of regulating the reserve assets ratio (the ratio of cash held by banks relative to the banks' total assets), stipulating a range (maximum as well as minimum) within which this ratio should lie.

The government's bail-out of the banking system has taken shape dramatically this morning, with the announcement that the Royal Bank of Scotland, LloydsTSB and HBOS have all sought capital investment from the taxpayer. In the case of the Royal Bank of Scotland, the government's stake will amount to 60% ownership of the company - effectively a nationalisation. In the case of the other two banks, which are set to merge, the stake will be about 40% - enough to provide the government with considerable influence.

From the banks' perspectives, there are strings attached to these investments. Directors will not receive bonuses this year, and future bonuses will take the form of shares rather than cash. The Lloyds TSB and HBOS investment is conditional on the merger going through. The terms of the merger have, however, been renegotiated in light of the fall in the value of HBOS shares since the merger was announced - instead of receiving 0.83 Lloyds TSB shares for each HBOS share, shareholders in HBOS will receive just 0.605 Lloyds TSB shares.

The issue of bonuses needs a more thorough look though. One of the key underlying causes of the present crisis is that the incentives provided to senior bankers have not been properly aligned with the long term interest of the banks themselves. Perhaps these incentive mechanisms were designed by the wrong people - or at least by people who needed better to understand the information deficiencies (opportunities to hide unpleasant surprises) that accompany the new breed of financial securities.

The government intends to use its position as majority or large minority shareholder to restructure the banks, then to sell off their stake to the private sector. It is not clear how long the restructuring process will take, nor how long we will have to wait for the economy to reach a position where private investors see banks as an attractive investment. An optimistic estimate might be 3 years. It could take more than 10. Whatever, the restructuring needs to include reform of remuneration practices within banks.

This needs to take on board the lessons of principal-agent theory. One interpretation - and one that has been well understood in the past - of this theory is that it is all about how to incentivise people. Another aspect of the theory has been much less well understood, though - and that has to do with how to incentivise people in the presence of information deficiencies and uncertainty. There are some lessons that need to be translated into action.

Meanwhile, governments in the Eurozone have agreed a package that guarantees loans that banks make to each other, and which provides assurance that public investment of capital will be made in banks that are struggling. The package resembles the British solution - which released £200 billion for loans to banks as well as providing up to £50 billion for capital investment. It remains to be seen exactly how the European solution will work - inevitably the need to work across borders renders matters complicated here.

Markets have responded positively to these moves.

The Bank of England has cut its interest rate by 0.5% - a day ahead of the expected announcement of the Monetary Policy Committee's decision - in a coordinated move by central banks that includes similar rate cuts in the USA, the Euro area, China and elsewhere. The cut should provide help bolster the demand for credit, hence investment, and hence overall spending, as the downturn threatens to turn into a severe recession. It is a very belated, but nonetheless welcome, move. It is unlikely to be the last cut in interest rates of the year.

An equally serious problem, however, is that the supply of credit remains frozen. The measures announced by the government earlier today - which involve it in taking partial ownership of commercial banks and providing banks with access to a huge amount of extra loans from the public purse - still need to be accompanied by conditions that enable banks to have renewed confidence in each other. Providing an institution to insure debts, and financing that institution, is one measure that I have mentioned before on this blog. A wholesale reform of the regulation of the financial sector is another. These are exciting, albeit traumatic, times indeed.

Bank A wishes to take a loan from Bank B. In normal times, Bank B would love to make the loan, since rates of interest are attractive. But there is a problem. Call that problem a trust gap. Bank B simply does not trust Bank A to be able to repay the loan.

In normal times, defaults on loans are quite rare, and banks insure themselves against such defaults by way of a markup on the charges they make for all loans. Just as shopkeepers make an allowance in their pricing decisions for the fact that some goods will perish while in stock, banks make an allowance in setting their borrowing terms. These times are not normal, however, and there is a need for a more formal type of insurance to plug the trust gap.

We might expect the need for such insurance to be met by the creation of a company specifically to offer it. Surely such a company would offer an attractive proposition to investors. But solutions of this type are unlikely to work in the present climate, simply because banks are not lending, and so they would not lend to a company setting itself up to provide this sort of insurance.

The government has, this morning, announced its willingness to buy shares in the major banks, up to the value of £50 billion. Details of exactly how the scheme will operate have still to be worked out. There are hints that the money will be available to banks that agree certain conditions - including conditions on remuneration of their own executives. That is as it should be. But it is also crucial that the conditions should include a means of breaking through the gridlock that has thrown the banking system into its present state of sclerosis. A start might be to require banks, with government as facilitator, to finance the creation of an institution that effectively insures their own business.

The Bank of England's Monetary Policy Committee (MPC) meets again this week to decide on the Bank's interest rate. With the pressures of inflation starting to erode (with falls in oil and fuel prices), the onset of recession should surely be at the forefront of the committee's mind. That suggests that they should cut interest rates in order to stimulate the economy.

And indeed they should. But the beneficial effect of such a stimulus is likely to be muted. In normal times, the cost of borrowing is a major factor in determining the extent to which people and businesses will borrow in order to finance their expenditure. To some extent, the same is true today. But these are not normal times. Another huge barrier to borrowing is the availability of credit. People aren't borrowing now, not so much because loans are expensive, but because they are not even available in the first place. The banking system is largely gridlocked by a general lack of confidence.

The authorities have been making funds available to the banks in an attempt to get out of this gridlock. Probably too much of this help has been in the form of short term loans, and not enough in the form of medium to long term loan facilities. Curiously, monetary policy is now as much about such detail as it is about the interest rate deliberations of the MPC.

At its second attempt, Congress passed the $700 billion bail-out. The markets have not responded positively, as further bank crises and confused policy announcements in Europe have cast yet more gloom on the outlook.

The most recent policy moves in Europe have aimed at securing deposits - ensuring that people who save their money in a bank will be able to access their savings in full, whatever might happen to the bank. The authorities have also made substantial loans available to the banking sector. For the most part, these loans have been short term, day-to-day, loans. The American bail-out makes longer loans available. Perhaps European policy needs to be tilted a little in that direction too.

The American administration has failed to push through Congress its propsal for a $700 billion bail-out of the banking sector. This has profound implications for the economy, not only in the US, but throughout the world.

Members of the House of Representatives appear to have been lobbied successfully by their electorate, which appears to perceive the bail-out simply as a means of keeping some fat cats in the banking industry in clover. It does not take much thinking to see that that can, at best, be only a partial view. Bankers may, in large measure, have caused the crisis - but that doesn't mean that they have the resources to avert it. The need for a large bail-out doesn't come primarily from money that has disappeared into bankers' pockets - most of the problem is that the money was never there at all, and all of us, as Joe Public, managed to kid ourselves that it was.

There is gridlock in the money markets. Banks will not lend to each other because they fear that they will not be repaid. This means that banks themselves have little resource that they can lend to end users. House buyers find mortgages hard to come by. Firms find that they cannot raise the capital to invest in new equipment. The reduction in investment exacerbates the problem of a stagnating economy. With that, prices on the world's stock markets are plummeting, and that has adverse implications for people's pensions and other savings. So consumer demand is diminished. We are caught in a vicious circle.

The $700 billion bail-out was an attempt to break out of that. For sure, it was going to involve tax hikes in the future. But for sure, if there is no bail-out, people will be hit in the pocket in other ways - through their pensions and savings, and through a prolonged period of recession. We have lived beyond our means for several years, and now - through the tax system or otherwise - it's payback time.

The tax option is probably the best of a bad set of options available. It can at least ensure some degree of fairness. It should be accompanied by a new and much tighter form of regulation in the financial sector. Hopefully the proposal will, in one form or another, be revived later this week.

It's less than 2 weeks since HBOS was taken over by Lloyds, and now the Bradford and Bingley is nationalised, with much of the company being sold on to the Santander Bank. Santander also own Abbey, and so this move further increases the concentration of activity in the banking sector in Britain. In so doing, it makes even more necessary a wholesale review and reform of regulation for the financial services industry.

The US authorities are engineering a plan to stabilise the financial markets. From what we know already, it seems that this might involve legislation that forces lenders to renegotiate debt repayments with homeowners who have been struggling to pay their mortgages. So much, so sensible.

It is also suggested that the government might set up an agency that would take on the bad debt that has come from banks offering mortgages in the sub-prime market. This news has really cheered up the stock markets in a big way - with the FTSE100 gaining over 7.5% this morning. Such a big rescue may well be necessary, but it would not all be good news. It would have adverse implications for taxes in the future. People know that, and they will start spending less now in anticipation of a higher tax burden. That will slow down and maybe even postpone the economic recovery.

Such a rescue would also have implications for the regulation of the banking sector in the future. If government bails out banks, it takes away the disciplines of the market. If it does this, it must impose some rather stringent regulation in order to ensure that banks do not take excessive risks. The whole regulatory framework for financial services is set to change in a massive way.

The news on financial institutions keeps coming thick and fast. AIG has been bailed out by the US government, in what is effectively a nationalisation. Meanwhile in the UK, HBOS (the merged Halifax and Bank of Scotland company) has been hit hard by an assessment by Standard and Poor's (a major credit ratings agency) which deemed it to be the most vulnerable of the British banks. The value of shares in HBOS has collapsed dramatically in recent days, and early today had fallen by a further 40%. The latest news is that Lloyds are contemplating a takeover. Shares in HBOS have recovered somewhat since this news broke.

With rumours sending share prices of some banks spiralling downwards, it is not surprising that other financial institutions are quick to seize the opportunity of takeovers on the cheap. It is becoming clear that one thing to emerge from this crisis will be a massive increase in concentration in the banking industry, with far fewer banks competing against each other. The dilution of competition as a discipline on banks' behaviour will bring about its own issues of regulation.

After the relative calm of late July and August, stock markets have been thrown into a frenzy once more, with the FTSE100 dipping below the psychologically important 5000 barrier. This has followed the weekend's dramatic events on Wall Street, which saw the investment bank Lehman's being forced into bankruptcy, Merrill Lynch being taken over by the Bank of America, and the American International Group (AIG) of insurers widely tipped to be the next financial giant to come under pressure.

The troubles of the global financial sector are by now well documented, and the events of the last few days just go to reinforce the fact that we are now living through the worst crisis of this kind for many decades. The scale of the disturbance within the financial industry makes clear the fact that these events will have serious ramifications for the real economy.

Some observers are pointing to the Clinton administration's repeal of the Glass-Steagall Act which, until 1999, forced investment banks and commercial high street banks to be separate entities. This Act, while in force, ensured that bankers did not take inappropriate risks with funds deposited by the public. The repeal of the Act, following prolonged and intense lobbying from the banking sector, allowed banks to take advantage of economies of scale and scope, and also allowed American banks to become more effective in competing internationally. The repeal should not have introduced new hazards - credit ratings agencies (CRAs) should have been reporting on risks to the main financial regulatory body in America, the Securities Exchange Commission (SEC) who would then act on the information. In practice, the CRAs may have failed to maintain enough of an arms-length relationship with their clients, and the SEC may have failed adequately to anticipate this. Repealling Grass-Steagall hasn't helped matters for sure, but that fact should not serve to hide some pretty serious failures that have happened elsewhere in the regulatory system.

The key questions are: how these failures arise (I suspect that the incentives people face are not always aligned with what is best for society); whether the failures are endemic (I suspect not); and what institutions (regulations, mechanisms) can be put in place to prevent them. An overhaul of the governance of firms in the financial sector is needed, ensuring that the incentives that workers face are aligned with the broader need for these firms to conduct their affairs in a socially responsible manner. Economists with expertise in personnel economics (and the application of principal-agent models in the workplace) should be at the forefront in the design of these reforms.

The Bank of England has kept the interest rate at 5% this month. As I have argued on this blog earlier today, I think a cut would have been timely. Downgrade your growth forecasts for the first half of next year.

The Bank of England's Monetary Policy Committee (MPC) is set to make its latest monthly decision on interest rates later today. Many pundits suggest that the MPC is unlikely to cut rates given the continued threat of inflation, but that cuts are likely in the months ahead.

We are on the point of entering recession. Inflation has risen to above 4%, and that is a problem in the eyes of many members of the MPC - they are, after all, briefed to keep inflation close to its target level of just 2%. But oil prices have fallen back quite sharply over the last month, and the recession is likely to dampen price increases further in the domestic economy.

It takes changes in the interest rate about 6-9 months measurably to affect economic activity. The MPC needs to be looking ahead to the spring of 2009 - by which time the threat of inflation should have receded and - without a fillip - the economy will likely have suffered three quarters of non-positive growth. Given what has happened in recent weeks to the price of oil, the Committee should not delay further in cutting interest rates.

A stamp duty 'holiday' has been announced. This means that, for the next year, people buying houses costing up to £175000 will not have to pay stamp duty on their purchase. Up to now, stamp duty has been payable on all houses costing over £125000. For the next year, the 1% rate of stamp duty will kick in at the higher £175000 level.

According to the Nationwide Building Society, the average house price in the UK is (to the nearest thousand pounds) £175000. The move on stamp duty is therefore clearly aimed at helping most directly people in the bottom half of the housing ladder. Others will benefit from a ratchet effect: as first time buyers decide to buy their own homes, sellers will find that they can trade up, and so on up the chain.

The stamp duty change is just part of a package of measures to breathe new life into the housing market. Households on incomes below £60000 per year are to be offered loans that are interest free for the first five years. At the end of the five years, they will have to pay a fee - and the success of this initiative will doubtless depend crucially on the (hitherto unknown) details of that fee.

It is to be hoped that this package of measures will deliver the stimulus that the housing market badly needs. Ultimately, though, people will start to buy into housing once they believe that house prices are no longer falling. They are unlikely to be impressed by a tax break worth £1750 if they think the value of their new home is likely to fall by more than that amount over the coming months. And they will not respond to a tax break if they think that it is still going to be available in the future. So we may have to wait till towards the end of the tax holiday (and the tax holiday will indeed have to come to an end) before many people decide to take advantage of the reduction in stamp duty.

Chancellor of the Exchequer, Alistair Darling, has hit the headlines over the weekend by claiming that the economic situation may be the worst that we have faced for 60 years. At the same time, David Blanchflower, the most dovish of the members of the Bank of England's Monetary Policy Committee (MPC), has gone public on his views that unemployment could top 2 million by the end of the year, and that the Bank needs to cut interest rates further.

Other members of the MPC may feel as though there is a pincer movement here, and that, for the first time since the Bank was given independence, we are seeing some real political interference in the process of setting interest rates.

Mr Darling's comments have had an immediate effect on the exchange rate, with speculators selling sterling like hot cakes. The value of the pound has collapsed to a two year low against the dollar. This, in itself, should do something to help the ailing economy, as our exports become cheaper relative to those of other countries.

The Chancellor has received a bad press following his comments. Perhaps he has indeed been politically naive. But perhaps, given the (sensible) decisions made in 1997, he is now using the only means left open to him to influence monetary policy - without being seen to do so.

Life is tough when someone makes you the captain just as you head for the rocks, especially when you aren't given control of the rudder. As the Welsh say, 'poor dab'.