By John N Muellbauer

When future economic historians look back to trace the triggers for the October 2008 financial panic and the unnecessarily severe recession of 2009, they will likely put their fingers on two.

• The failure to keep Lehman Bros functioning as a going concern.
• The failure of the European Central Bank and the Bank of England to use their interest rate setting firepower to organise a substantial globally co-ordinated interest rate cut (the cut of October 8, 2008 was too timid).

A convincing argument for independent central banks adopting an inflation targeting framework is that, where central banks are forward looking and responsive, they should be able to avoid deflationary slumps. The markets then should expect the central banks to assess clearly the global economic situation and the downside risks, and take decisive action.