Despite those unprecedented falls in activity, there are some signs that the British economy is beginning to stabilise, and financial markets have improved markedly. There are three solid reasons for thinking that a recovery in activity was likely to occur at some point this year. The first I call the “Honda effect” – many firms, as Honda did last year at its plant in Swindon, cut back production and met demand from stock, resuming production this year once inventories had been reduced. The second factor is the level of sterling which, despite its recent rally, is still some 20% lower than in the summer of 2007. That will encourage a switch in spending, at home and abroad, towards goods and services produced in the UK. Finally, and perhaps most important, is the enormous policy stimulus that has been injected into the economy. Bank Rate was cut by four percentage points in four months. But the Monetary Policy Committee judged that even that was insufficient to prevent inflation falling below our 2% target, and so it embarked on a programme of asset purchases designed to increase the money supply and improve conditions in non-bank corporate credit markets. The programme will shortly be extended to working capital finance, which should be of particular help to smaller companies. But the Bank must not become the arbiter of the allocation of public credit to individual companies or sectors – such decisions are rightly and necessarily the province of government.
For a generation or more, businesses and families up and down the country were told, not least by the City, that the disciplines of the market economy were essential, even if painful in the short run, for greater prosperity in the longer term. That belief in the merits of a market economy was embraced and for many years was not misplaced. But out of the blue – in this case the financial sector – came a crisis that did not stem from weaknesses in the real economy. It has wreaked havoc on those same businesses and families. Unemployment, as we saw in today’s figures, is rising sharply. And yet it is the banking system that has received financial support on an almost unimaginable scale. We who work in the financial sector have much to do to regain the trust of those who work outside it. “My word is my bond” are old words, but they were important. “My word is my CDO-squared” will never catch on. There is no support in this country, and no case, for excessively bureaucratic regulation. But change to the structure, regulation and indeed culture of our banking system is necessary. Blaming individuals is no substitute for acknowledging the failure of a system, of a certain type of banking. We have a real opportunity now to put that right, and regain the trust that has been lost.