AS more data emerge it becomes ever clearer that this recession is worse than anything we have experienced for several decades and that its impact will endure for many years to come - not least in terms of the public finances!
Of course the recession is not just a UK phenomenon. It is part of an amazingly widespread international economic debacle. However, it is still disappointing that we have been hit so hard, when we had enjoyed an exceptional period of steady and sustained growth.
The dramatic departure from this stable trend has to raise urgent and complex questions about both macro-economic governance and financial sector regulation.
We have heard contributions to this debate from Banko f England Governor Mervyn King and Chancellor Alastair Darling - and indeed from the Bank of England's former deputy governor, Sir John Gieve, at the David Hume Institute a couple of weeks back. Nevertheless I feel obliged to contribute my two pennyworth.
Let me take the macro side first. From the early 1990s onwards there was a huge feeling of relief that UK economic governance had been markedly improved. This was based primarily upon widespread support for the moves by Messrs Clark and Brown towards first clarification of the role of the Bank of England on monetary policy and then its independence.
These moves on the monetary policy were coupled with increased confidence that fiscal policy was becoming better managed via the Code for Fiscal Stability and all that.
So how come these measures "did not work"? I would suggest first that - rather like the Maginot line - monetary policy was facing in the wrong direction for the problems which emerged and second, fiscal policy was inade-quate in terms of transparency and external oversight.
UK monetary policy sets out to target low and stable inflation, because inflation was for so long the UK's arch economic enemy.
The assumption has been that stabilising inflation would provide the context within which the economy would grow steadily, managed by a combination of fiscal policy and micro-economic measures aimed at encouraging competition and efficiency. Effectively the view was that cracking inflation would lead to the end of boom and bust.
As uncertainties grew in 2008, the Monetary Policy Committee inevitably continued managing monetary policy according to its prescribed policy remit. But the dangers emerging related primarily to asset price inflation rather than retail price inflation.
The MPC was not charged with managing asset prices; worrying about them, yes, managing them, no. The belief was that constraining retail prices, alongside appropriate fiscal policy, would lead to asset bubbles gently deflating and continued stable growth being secured.
Given developments over the past two years, we need to decide whether the remit of the MPC on monetary policy has to change. One target (CPI at 2% +/- 1%) and one instrument (base rate) was a neat and tidy structure that served us well but has now been proven inadequate. We now need more complexity to cover present and future risks.
Attention is also required to the oversight of fiscal policy. Over the past several years the policy stance - the balance between overall expenditure and overall revenue - has been too lax. We would have been better placed to cope with the recent shock to the system if policy had been tighter during that period.
Perhaps we need independent assessment of policy and input into how this should be changing as the economic cycle evolves. We are most fortunate to have the wisdom and integrity of bodies like the Institute for Fiscal Studies. The IFS, National Institute, etc, certainly keep chancellors on their toes. A beefed-up version with a formal locus could be a major step forward.
Turning briefly to the financial sector, there is evidence to suggest that the present tri-partite arrangement (involving FSA, Bank of England and Treasury) has been ineffective. Certainly King is looking for more power for the Bank. My suggestion is that we should distinguish between, on the one hand, forming the view on the overall financial position and outlook and its implications and, on the other, regulation of the sector within that context. The first task must be for the Bank, with input from the Treasury. The second is for the FSA.
I am also attracted to the suggestion we should distinguish between retail and investment banking and minimise the risk that the "casino" characteristics of the latter adversely impact upon the more common or garden activities of the former. Separation would be an extreme solution. Regulation that appropriately distinguishes between the two components may be more feasible.
None of the above should be taken to play down the essential requirement for international co-operation.
But we must look to make sure we take account of the changed environment and set our domestic macro governance and financial sector regulatory arrangements on a forward-looking basis. Jeremy A Peat, director, The David Hume Institute
