Writing in The Independent, Vince Cable said:

No one fully understands the scale of the complex but extreme economic crisis we face or has any simple, silver bullet, solution to it. The problems are partly international – the “credit crunch” – and partly national.

The latter is a legacy of a long period of economic growth built on debt financed household consumption and a grossly inflated bubble in house prices. Both of the international and home grown problems are difficult; together they are potentially lethal. I believe we face a real emergency. And it will not be over soon. This crisis could drag on for a decade.

It is necessary to look into history and dusty economics textbooks to find precedents and rules of engagement. There are several broad principles to prevent a recession from turning into a prolonged slump with falling or stagnating incomes, large scale unemployment, and unsustainable government budgets. The first step is to use monetary policy – interest rate cuts – recognising, however, their limited reach at present.

A second priority is for government to provide a stimulus, through tax cuts and public investment. I accept, reluctantly, that additional borrowing is necessary to prevent a further downward spiral…

The third, and most important, step relates to bank lending. The balance sheet – assets and liabilities – of a single major bank, like Barclays, is twice as big as the whole of government debt. Any management decision to contract lending to business significantly to conserve capital or to protect dividends and bonuses will wipe out the effect of any fiscal stimulus.

That is why the Government will have to get its hands dirty intervening more actively in financial intermediation. Having committed £37bn to recapitalise banks – with potentially more needed – and much more in interbank lending guarantees, the Government cannot walk away from direct responsibility. It must take seats on the boards of leading banks, not to micromanage them, but set strategy…

The battle lines are already being drawn as it becomes clear that “middle Britain” is being lined up to pay higher income tax through national insurance. There is a compelling case for a more egalitarian approach: a fairer sharing of the pain of recession. It involves a systematic attempt to lift large numbers of people out of direct tax and cut the tax burden at the lower end with an assault on the allowances and reliefs of the wealthy than the Government’s tokenistic higher rate.

You can read the full piece here.