The Federal Reserve’s surprise emergency cut in interest rates on January 22 may be followed quickly by another reduction at the formal meeting on January 30 and almost certainly presages easing by European central banks. We should banish all talk about whether these initiatives are inflationary or not. It is not for nothing that we call a banking crisis a “deflationary credit event”. What the Fed is trying to do is to head off the worst aspects of a banking crisis in which the arteries of credit that drive economic activity are becoming blocked.

The feast-to-famine turnround in the willingness to lend and the terms of lending, while rare, is not unprecedented. It happened after the US savings and loan crisis in the 1980s, in the commercial property fall-out and Scandinavian and Japanese banking crises in the early 1990s, and after the dotcom bust in 2001. The most recent feast can be appreciated by looking at the credit intensity of gross domestic product, or the amount of credit generated per $1 of GDP growth. This remained at about $1.50 for decades after 1950, eventually rising in the 1980s and peaking at $3 during the 1990s. The credit machine went into top gear again and by 2007, nearly $4.50 of credit was being generated per $1 of GDP growth.