Charles Bean of the Bank of England has delivered an in-depth speech on the subject of the Great Contraction.  Many of its observations will be familiar to you students of the Crunch, but they are exceedingly well-put and, coming from an influential BOE character, worth reading. Above all, he asserts that the credit crunch was a key determinant of the deep economic recession that followed the turmoil of September/October 2008.  He provides several mechanisms: the loss of wealth, the withdrawal of credit, feedback loops between the banking sector, households, demand, house prices, back to banking, and sharply lowered expectations of future economic growth and credit availability.  Above all, he thinks bank capital is essential - which is why the recapitalisation of October 2008 was so important:

"it seems likely that the adequacy of bank capital and the associated phenomenon of
financial sector de-leveraging are likely to play a central role. Capital is essential because it is
the means by which intermediaries persuade creditors that they will almost surely get their
money back. Increasing capital is one way to get leverage down; that is why governments in
the US and other affected countries forced banks to raise more capital privately or else accept
injections of extra capital financed by the taxpayer. Extending guarantees on funding,
whether retail or wholesale, is another way to make creditors believe that they will get their
money back, as are measures to insure or quarantine the risky bad assets."

 Who could argue with this?  Not me - it is hard to imagine what the world would look like had the banks' diminishing capital been allowed to carry on falling last Autumn. But 'bustling with economic promise' is unlikely to feature in the description. 

But Tim Congdon has a radically different view, one that to me seems to cross the line into the realm of ideological barminess. The banks didn't need the capital, they were bullied into it.  The economy would have been fine if the government/BOE had only provided enough liquidity.  Bank capital is nothing to do with it:

"Against the banks' protests that macroeconomic conditions were not so bad and a recovery could be envisaged in a few quarters, the Bank put together a planning scenario with a deep, long-lasting recession  . . .in days of ferocious bargaining, some of the world's largest financial organisations - some that have been household names in this country for decades, and had long been admired around the world for their efficiency and expertise - were bullied into raising capital that they themselves did not think necessary". 

What an amazing account. Compare with this from the FT at the time: 

The executives, including John Varley of Barclays, Sir Fred Goodwin of Royal Bank of Scotland, Lloyds TSB's Eric Daniels and António Horta-Osório, head of Abbey, the UK subsidiary of Spain's Santander, expected to hear Mr Darling outline a plan. To their surprise . . .Little sense of urgency was evident. Chief executives, who only a few months ago might have recoiled at the idea, welcomed it in principle. They also suggested the government made capital available that the banks could draw on if losses proved worse than expected. This would reassure depositors and creditors that the banks would not run out of money. Above all, however, the bankers argued for clarity. Mr Varley was vocal in pressing the chancellor to get on with whatever he was going to do. But yesterday morning, Robert Peston reported on the BBC that RBS, Lloyds TSB and Barclays had signalled to the chancellor they would "like to see the colour of the taxpayer's money rather quicker than he might have expected".

And never mind that plenty of banks also chose to raise capital, including for example HSBC which was far healthier.

According to Congdon, the economy only turned down because there were warnings of a big recession from Government: yes, that's right, the famous free market that monetarists trust so well in other areas can be led round by the nose by what Darling thinks will happen.  Whereas Sumner thinks the markets were showing amazing prescience in predicting a recession, predictions that the government authorities ignored.  I am still in the dark about what true monetarists really think about markets - are they perfect efficient instruments for the prediction of future events, or dumb animals that can be manipulated with ease by central authorities?  Both views seem to emerge from these writers. 

Read both Bean and Congdon. The latter is great, because he lays bare the way monetarists (are forced to) think if they are to be consistent in their diagnosis and prognosis.  His account for how increased money can boost the economy without banks having increased capital is particularly, um, courageous. 

Tyler Cowen agrees the bailouts were a good idea. 

In other news:

Gordon Brown finally admits the inevitable.  Too late: credibility blown - chance of leading rather than following debate gone. 

Debate about fiscal crisis in US is hampering Obama's reforms. 

Excellent discussion from Mark Thoma about the real use of macroeconomic models.  Prediction is not the point. 

A really gloomy prognosis from Tim Price.  

So for those chasing the rally: what, precisely, is your endgame? Perhaps you see extraordinary levels of government indebtedness miraculously evaporating amid new economic expansion, even as taxes rise. Perhaps you see ailing, cash-hoarding banks mysteriously opening the lending taps for the next wave of entrepreneurs. Or perhaps you are looking at the future through the hugely distorting prism of the recent credit bubble. Years of massive misallocation of capital cannot be followed by effortless recovery

The IPPR calls on the government to ask richer students to pay their fees upfront.