As exercises in self-exculpation go, Sir Mervyn King's 2012 BBC Today programme lecture deserves a medal. Rarely has so much bravery, indeed foolhardiness, been displayed in such total disregard of the facts.
The Great Recession of 2008 and 2009 was the UK's worst setback in demand and output since the 1930s. Official statistics on the matter are clear-cut. In the year to the first quarter (Q1) of 2009 spending slumped by 8.4 per cent, far worse than in the previous record postwar decline, which was 5.3 per cent in the year to Q4 1980.
Further, whereas policymakers in 1980 had the excuse that the pain of recession was justified by the subsequent gain of the annual inflation rate being cut from more than 20 per cent, the pain of the Great Recession has had no anti-inflation gain whatsoever. In fact, inflation has been a little higher in the last few years than before the Great Recession.
The narrative of the latest boom-bust episode has been similar to that in other cyclical upheavals over the last 40 years. Banking system delinquencies have been the source of the rise and fall of expenditure from 2006 to 2010, just as they were in the rise and fall of expenditure in the Heath-Barber boom-bust of 1971 to 1974, and in the rise and fall of expenditure in the Lawson boom and exchange-rate-mechanism bust of 1986 to 1992. In all three dramas banks expanded their loan portfolios too rapidly, which led to unduly high growth of the quantity of money (that is, of bank deposits).
High monetary growth was accompanied by buoyant asset prices, particularly of the prices of houses and commercial property. That stimulated strong increases in consumer spending and corporate investment, putting strain on the nation's resources and upward pressure on inflation. Action has been taken to check the banks: in past cycles by sharp rises in interest rates and in the latest one by regulatory bank-bashing. Within a few quarters the rate of money growth has collapsed, asset prices have fallen, both the household and corporate sectors have retrenched — and so on.