charles bean : the economic outlook remarks by mr charles bean, deputy governor of the bank of england, at the national farmers ’ union conference, birmingham, 16 february 2009. * * * the weather is at the forefront of farmers ’ minds but rarely crosses that of a central banker except when, as two weeks ago, a dump of snow brings london to a standstill. but economists ’ lack of interest in the weather was not always the case. william stanley jevons, one of the great victorian economists, thought sunspot activity was the key to understanding economic cycles. sunspots affected the weather, which in turn determined crop yields, demand and output in what was still a largely rural economy. no one takes this theory of cycles literally. but it is a useful metaphor for the way unforeseen shocks can switch an economy from one path to another. today, the global and british economies have suffered such a shock, though one that is man - made in origin rather than extra - terrestrial. the origins of the crisis lie in the balmy economic weather prevailing in the decade or so before mid - 2007. growth was steady and inflation low and stable in the united kingdom and other advanced economies, while rapid development in china, india and other emerging market economies was lifting millions out of poverty. economic stability boosted confidence and encouraged an expansion of credit. moreover, high levels of savings in some asian economies, coupled with loose us monetary policy, drove global real interest rates unusually low. this mix of exaggerated confidence and low real interest rates encouraged investors into riskier assets and banks into riskier lending, epitomised by the us sub - prime housing market. that was compounded by a lack of incentive for care in extending loans, if they were then packaged up and sold on to others. in august 2007, the economic weather turned distinctly autumnal. falling us house prices and rising sub - prime defaults led to nervousness about the value of assets backed by those mortgages. moreover, losses associated with sub - prime loans began appearing in places noone had anticipated, revealing how opaque many financial instruments were. the markets for these assets closed and their prices plummeted, putting pressure on the balance sheets of the financial institutions holding them, while wholesale funding dried up. and the wide dispersal of the suspect assets meant these balance sheet pressures were quickly transmitted internationally. in the united kingdom, banks became increasingly cautious in lending, adding to downward pressure on housing and commercial property prices, and slowing growth

in bank rate will continue to provide a building boost to demand through this year and beyond – we don ’ t have to keep on cutting rates in order to provide a stimulus. second, in november, the government announced a temporary cut in vat and an acceleration of spending on public investment projects, which should help support demand in the near term. third, and most importantly, to supplement the measures taken last october, the government has launched a five - point plan to ensure an adequate supply of credit to households and business. this comprises measures : to reduce uncertainty about the adequacy of bank capital by capping the losses on their holdings of risky assets ; to facilitate bank funding through the attachment of state guarantees ; to boost the availability of funds to business through direct purchases of company debt ; to raise the availability of mortgage finance to households by halting the running down of northern rock ’ s mortgage book ; and, finally, to establish a concordat with the banks under which they will maintain an adequate flow of credit to the real economy. the asset purchase facility, operated by the bank for the government, will purchase up to £50 billion worth of commercial paper, corporate bonds and similar securities, with the aim of increasing the liquidity of these instruments, reducing the cost of capital to businesses and stimulating increased debt issuance. as we estimate that illiquidity presently accounts for getting on for half of the 5½ percentage points interest rate spread of investment - grade corporate bonds over government debt, these actions, if successful, could have a powerful impact on the cost and availability of funds to corporate borrowers. the first purchase under this facility was made last friday. in the first instance, purchases are to be financed by government borrowing. but, subject to the agreement of the chancellor, this facility can also be used by the monetary policy committee to undertake further easing of monetary policy in pursuit of the inflation target. that is likely to prove useful now that bank rate is nearing its floor. in that case, purchases would be financed by the creation of so - called central bank money – effectively ious drawn on the bank of england. at such point, we might also want to expand the range of assets purchased under the scheme to include government debt. the purpose of these actions would be twofold : to push down the yields on a wider range of assets than usual ; and to increase the supply of broad money ( bank deposits plus banks'own reserves ) in the economy. both should help to boost nominal