interest rates to an historic low of 1. 5 %. similar measures have been taken overseas. my purpose today is to explain how this recession differs from the others i have lived through, why that calls for a wider range of responses than normal, and the difference between the policy objectives in the medium term and the short term. the boom before the bust? what is striking about the run - up to this recession is that we did not see the booms in output, employment and wages that led to past recessions. past recessions, in good measure, reflected deliberate decisions by policymakers to rein in spending and damp the inflationary pressures that had been building up. the rise in interest rates then led to a correction in the spending behaviour of households and companies as optimism about future income growth in the boom turned to uncertainty and gloom in the bust. chart 1 highlights what was happening to domestic output in the two years before the last three recessions. the barber boom was a case in point, when output rose by 10 % over the year to 1973 q1, and then fell by 3 % over the following year. you can see a similar pattern before the recessions of the early 80s and early 90s. but in 2006 and early 2007 growth was close to its average over the past 30 years. that is not the whole story of course. when we look at asset markets, a different story emerges. the credit boom may not have led to a rapid inflation in the price of goods and services, but it did support a surge in the price of a broad range of assets. property prices soared ( chart 2 ). the price of stocks and bonds also rebounded strongly from their early decade lows. that rise in prices was driven by and reflected in a sustained rise in borrowing. a combination of factors – including a large flow of savings out of the emerging economies, and a reduction in the return that investors required to bear risk – had allowed the banks to raise large sums of money at a very low price. and, as memories of earlier busts faded, the margin that banks charged their customers over those lower funding costs was also compressed by increased competition. households and companies were therefore able to borrow more money at ever more attractive terms. loan to income ratios crept up. and uk banks became increasingly dependent on borrowing from wholesale investors overseas ( chart 3 ). by the eve of the credit crunch in 2007, the balance sheets of the banks and households and some companies to whom they had lent large sums

by the ebb tide of global demand. in the united states, the ism survey of manufacturing activity posted a near thirty year low in december. and in japan, the november fall in industrial production was the largest percentage contraction on record. the recent industrial production figures from germany, france and italy tell a similar story. the outlook for the remainder of 2009 the immediate prospects in the uk, as elsewhere, remain difficult. data on new orders suggest that output is likely to fall sharply in the first quarter of 2009 as well as in q4 of last year ; further declines in output, if not at the same pace, are likely beyond then. the widening margin of spare capacity will act as a significant drag on costs and prices. coupled with the deflationary impact of falling commodity prices and the cut in vat, cpi inflation will continue falling over the year and may go well below the target rate of 2 % despite the impact of sterling ’ s depreciation on import prices. with its inclusion of mortgage interest and other housing costs, the change in the rpi is expected to turn negative. the downturn itself has set powerful contractionary forces to work. over - indebted households and companies will be pulling back on spending to try and pay down those debts. although the recent falls in commodity prices will help to mitigate some of the downward pressure on household income, rising unemployment is not only constraining the spending of those losing or not finding jobs but is likely to boost precautionary saving across the household sector. and falling property prices are reducing activity in the housing market and the construction sector. with credit hard to come by, companies will find it difficult to fund new investment projects and few companies would be likely to invest large sums of money even if they could raise the funds. commercial property prices are still falling rapidly. more generally, the uncertainty over the depth and duration of the recession discourages investment and puts cash flow at a premium. there is every incentive for companies to batten down the hatches. unsurprisingly then, investment intentions have fallen sharply ( chart 6 ). the stock cycle is also depressing output. stocks initially rise as sales falter and those stocks of inputs, work - in - progress and finished output that companies have become more difficult and expensive to finance. but running stocks down involves sharp cuts in production as we are seeing in the motor industry. all these forces develop in any recession. the special features of this one are its global