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?