Speaking to the Royal Society in Edinburgh last week, David Blanchflower said he agreed with sentiments that the MPC should have been more aggressive in cutting interest rates.
He said: “My biggest concern right now is that the credit crisis will trigger a rapid downward spiral in activity. Now it is time to get ahead of the curve. I believe that more action is needed to prevent the UK falling into recession. An important step is the Bank of England’s special liquidity scheme to increase liquidity into the system.””Monetary policy still remains restrictive and we need to take action to loosen policy sooner rather than later. The slower that rates fall, the further they will eventually have to go down to boost the economy.”
Blanchflower said he was concerned that the UK exhibits broad similarities with the US experience.
He said: “It does seem to me that we really know very little in 2008 about how truly to stabilise economies and run them properly in the face of shocks both to commodity prices and to credit.”
Blanchflower said he believes a correction of about one-third in house prices does not seem implausible in the UK over a period of two or three years if house price to earnings ratios are to be restored to more sustainable levels.
He stressed that while he is not suggesting that house prices will drop by 30 per cent, it could be a possibility. He said: “Cutting interest rates now may help to prevent such a dramatic fall.”