The challenge for us here and in every country around the world is to deal with today's problems, but also to prepare for economic recovery. And everything we do will be all the more effective if it is matched by action from others.
The world economy is seeing the most difficult economic conditions for generations. They are the result of bad decisions by international banks – encouraged by low global interest rates, they took on too much risk. The banks often did not fully understand these risks. As the banks realised they were all exposed to each other's losses, they started retrenching, which cut off the supply of credit to the world economy. This global credit crunch has become a global recession. We are dealing with a constantly evolving situation. But I am confident that if we take the right steps we will get through this.
In October, we acted to provide additional capital for the banking system, preventing its imminent collapse. We could not have a British repeat of the failure of Lehman Brothers, one of Wall Street's biggest banks. We did not do this to help out the banks for their own sake. The action we took is designed to protect families and businesses from the past excesses of the financial sector. So in return for support, I imposed conditions on the banks to maintain the availability of lending. And for those banks that received public support, there was also a ban on paying bonuses to board members.
We were one of the first governments to restrict banking bonuses. Following October's recapitalisation, which saw public money used to purchase bank shares, we imposed strict conditions on RBS and Lloyds-HBOS: the boards of these banks agreed not to pay any cash bonuses in 2008. In November, we also took action to support the economy. The reduction in income tax, the temporary cut in VAT and the one-off payments for pensioners and other groups will boost people's incomes as the economy slows. Our decision to bring forward £3bn of capital spending will support jobs in construction and industry.
Almost every country is putting money into the economy now, even if the way we do so varies. In the past few days, we have seen provisional agreement on another US stimulus worth more than $800bn. This is a huge boost to the world economy. And monetary policy also has a role to play. Falling inflation has allowed the Bank of England to cut interest rates in a decisive way. But as interest rates approach zero, the Bank must consider how to continue to meet the inflation target.
Unprecedented stimulus action today comes hand-in-hand with careful exit strategies for the future. I have already announced plans to bring the public finances back towards balance. The Opposition talk about fiscal responsibility, but few countries have actually taken steps towards consolidation.
In the last month, I announced further measures to remove uncertainty from the banking system, and so allow an increase in lending. Though lending from the UK banks has increased since October, there is a gap in the market for credit, as specialised financial institutions scale down. My plans include measures to either insure against extreme losses or separate out impaired assets into a parallel financial vehicle. The support mechanism may vary between banks but the objective is the same – removing uncertainty by increasing the supply of credit to the economy. This support also comes with conditions attached.
I have been clear that the authors of this crisis should not be rewarded for their failures. It is wrong to reward people whose excessive risk-taking brought down the banks causing misery to millions of their customers. Success should be rewarded, failure should not. So for those banks receiving this additional public support, there will be restrictions on future pay policy. We also need to prepare for recovery, both in the financial system and the wider economy. First, banks everywhere need to change the way they operate. Society needs banks as much as banks need society, and banks need to recognise that sense of mutual duty. This is why I have established an independent review of corporate governance of the banks, to look at how we can improve the way boards manage the banks, including tackling incentives in their pay policies to take excessive risks.
Second, just as the banks need to learn lessons, so should governments and regulators. The Financial Services Authority is already looking at how regulation can be improved. I will publish proposals later in the spring, and I will continue to make the case for strengthening global regulation, including by making it more countercyclical.
Third, our policy must lay the foundations for the strong recovery of our well-diversified economy. Some of our manufacturers are among the most productive in Europe. We are leaders in creative industries and science. The challenge is to protect the achievements of the past 15 years.
Fourth, the economic upturn must not come at the expense of the environment. I believe the UK can lead the green global recovery. We will soon introduce carbon budgets, making us the first country to set legally binding targets for emissions reductions. We are the world leaders on offshore wind energy generation. I am confident that millions can be employed in "green-collar jobs" over the next decade.
Fifth, our presidency of the G20 this year will bring the world's major economies together. In April, world leaders will meet in London, and we hope to agree a way forward. Because if all countries work together, our individual actions will see their effect magnified. When each country helps its economy – with a fiscal stimulus, monetary boost or support for the banks – it is also helping other countries. The world's economies are all connected, and just as globalisation brought huge benefits in the good times, we must harness its power to come out of the bad times. We must not see a retrenchment towards protectionism. And in time, we must also work together to reform the international institutions that govern the global economy.
The world faces tremendous challenges. Just letting the recession take its toll is no answer. Governments should support people and business when they need it. In the words of John Maynard Keynes: "I would rather be roughly right than precisely wrong."
Join our new commenting forum
Join thought-provoking conversations, follow other Independent readers and see their replies