Lord Lawson makes a point that monetary policy is the effective club for these times in an article in the FT this morning. On reading the piece, it was striking that he went on to state that monetary policy is problematic due to 'the continuing weakness of the banking system.' He goes on to suggest further capitalisation and de-toxification of banking balance sheets: a similar-ish broad approach to that adopted by David Cameron who would use state guarantees to underwrite lending.
The problem with the argument is that while this approach, which may be of no less risk to the tax payers than a fiscal stimulus, is taking time to have an effect, the economy is still tanking. The government's chosen method of stimulus is, in addition to a monetary loosening, a VAT reduction with some additional public works and an extension of tax cuts announced earlier in the year. In an environment where the banking system is weak, perhaps weaker than at any point since the 1930s, this fiscal intervention becomes necessary.
To say that we should rely on monetary expansion solely while it is ineffective as a policy is a strange and contradictory perspective and this seems to be the position that Lord Lawson has manoeuvred himself into.
The effectiveness of the Chancellor's Report, political as well as economic, will be determined in major part by the reaction of the capital markets- watch sterling with an eagle eye over the next few days. Will they buy the argument that this is a stimulus that will work? If they do, then the economic and political dividend could be significant. If they do not, then this gamble, and it is an enormous but necessary gamble, then things become very difficult indeed.
Over to the Chancellor.....