There are defining moments in politics when the argument shifts decisively, old dividing lines are demolished and a new equilibrium emerges. This past week I think we may have just seen one in Britain. All of Gordon Brown's central arguments on the economy have now collapsed, and the timing could not be worse. As the G20 summit approaches, the Government's economic policy is now discredited and rudderless.
The first of those arguments is that the British economy was sound until it was hit by a banking crisis that came from America. It is why Mr Brown says he "has nothing to apologise for". The problem is that even that Americans don't seem to buy it. For a start, Paul Volcker, President Obama's senior economic policy adviser, said a few days ago that the banking crisis "is probably worse in the UK".
The truth is that the banking crisis holds up a mirror to our wider economy and reflects the fundamental imbalances allowed to develop throughout it for a decade. Our households, our businesses, the Government, and our whole country became unsustainably dependent on debt.
Of course, the same was true in the US. President Obama's Treasury Secretary, Tim Geithner, said last week that he too sees the problem of debt as a root cause: "No crisis like this has a simple or single cause, but as a nation we borrowed too much and let our financial system take on irresponsible levels of risk." How refreshing it would be to hear such a frank assessment from Alistair Darling's lips.
But we borrowed even more than America. Our households became more indebted, our banks were more highly leveraged, and our housing bubble was bigger. So as David Cameron wrote in the days after the run on Northern Rock: "Though the current crisis may have had its trigger in the US, over the past decade the gun has been loaded at home."
That leads to the second of Gordon Brown's arguments that has collapsed this week – the idea that Britain is best placed to weather the recession. As the man who ran economic policy for the past 12 years, it's obvious why he might want people to believe that, but it doesn't stand up to the facts. Last week we learned that our economy shrank faster than previously thought in the second half of last year, and by more than the US economy. That's why the IMF is forecasting that we will have one of the deepest recessions of any major economy and the OECD says we will have the largest rise in unemployment. We are set to have the highest budget deficit of any G20 country next year, according to the IMF, leaving us least able to take the actions other countries are taking to help families and businesses in the recession.
The dreadful state of our public finances is at the root of the last week's third and most significant development. The Governor of the Bank of England's unprecedented warning that a further significant fiscal stimulus is unaffordable has simultaneously destroyed Gordon Brown's economic and political strategy, and vindicated the decision we Conservatives have taken on how to tackle the recession.
I challenged Alistair Darling twice in Parliament on whether he agreed with Mervyn King's analysis and he twice refused to answer the question. He was not even able to express his full confidence in the Bank of England Governor. That shows our economic policy-making machinery has become dysfunctional.
The Government should now follow the advice we Conservatives have consistently offered. I argued almost six months ago in a speech to the London School of Economics that, given the poor state of our public finances, there were limits to how much borrowing the markets would tolerate, and that a fiscal stimulus would risk undermining confidence, and increasing the long-term interest rates that the Government has to pay on its debt – precisely the opposite of what the economy needs. Instead, we should "let monetary policy do the heavy lifting in stimulating demand".
That's why for months we have been calling for a big, bold and simple national loan-guarantee scheme. That would get credit flowing, bring down the interest rates faced by businesses, and help stem the tide of job losses that are dragging the economy down yet further. After first attacking our proposal, the Government unveiled a smaller version to much fanfare in January. But two months later not a single business has received assistance under the scheme, and not a single job has been saved.
We have also proposed targeted and funded tax measures to help save our small businesses and firms that take on the unemployed. Labour MPs now queue up with retailers to denounce the VAT cut as pointless and expensive, while this week we will observe a bitter irony: a British Prime Minister will host the leaders of the world's largest economies when the economy he ran for a decade is the worst-placed of all of them to weather the recession, and when his economic strategy has collapsed just as it was confronted with a reality check.