Savers don’t like it: they say the Bank of England has gone too far. Business groups don’t like it: they say the Bank of England didn’t go far enough. Who is right?

Across the economy some do, some don’t.

But what about all this talk that the government may print money – does it mean that all this new money being created will come back to haunt us in later years, and lead to nasty inflation. There are real fears this may happen, some are even drawing analogies with Zimbabwe and its hyperinflation – created because the Mugabe government printed too much money. Are these fears justified?

It’s a strange thing, but all of a sudden public focus has turned to savers. For years we were told cuts in interest rates were a good thing. Now the view seems to be reversing. We need savers’ money, goes the thinking, because without it banks can not rebuild their liquidity. The argument continues, the price of credit is not the problem. The real problem is its availability. Banks can no longer rely on money flooding in from abroad, so they a need supply of money from within the UK. Banks need more savers.

Another argument suggests that if you live off your savings, then cuts in interest rates hit your own levels of disposable income. So for these people, the falling interest rates mean less consumption. We are being told the economy needs consumption levels to rise. Well, maybe higher interest rates, not lower, are required for that.

In any case, exactly who is benefiting from these rate cuts? The cost of credit card debt hasn’t fallen, and it seems only a minority of mortgage holders are seeing rate cuts passed on to them. And yet on the other hand, savers are seeing rates fall. If you like, the banks are having the best of both worlds. They are not passing rate cuts on to borrowers but they are reducing rates for savers. It is no wonder the tabloids are seeing red.

But there is another way of looking at all this.

First of all, if we do indeed start experiencing deflation, and prices fall, then even if the rate of interest is zero, savers are still effectively receiving a positive return on their money. Bear in mind there is a time lag between changes in interest rates and inflation. The Bank of England has to try and think up to 18 months in advance. Deflation is normally thought to be good news for savers. So while on one hand we are being told to consider savers, we are forgetting the whole point of these rate cuts is to try and avoid deflation – which could encourage too much saving. If anything, the outlook for savers is pretty good right now.

As for those nasty banks, it does seem there is a lot of living in the past going on.

The banks made massive mistakes. They were far too exuberant with their lending. We all know that. As a result, they have found that they are undercapitalized. The government lent them money, but at a massive rate of interest. Banks need to rebuild capital. They need to make profits – big profits. On the one hand, they are being lambasted for allowing themselves to let their balance sheets become so stretched. On the other hand, they are being lambasted for trying to solve the problem by rebuilding their balance sheets.

The mistake the government made was in demanding such a high interest rate for its money. Instead, the government should have taken bigger equity stakes in the banks. This would have overcome some of the moral hazard issues we keep hearing about too.

To an extent, the problem is that banks, governments, and indeed the public, are still fighting the last war.

Think of it in terms of Joseph, he of the multi-coloured coat, and Pharaoh. Under Joseph’s advice, Egypt ensured that during the seven years of feast, grain was kept back, so that when the seven years of famine followed, it still had food in store. In other words, it saved during the boom, and it consumed during the recession.

It should have been like this. Instead, we failed to save during the boom. Now there is a recession, the trend is towards saving. So banks are now doing the thing they should have done in the boom. Regulators are insisting on greater prudence, when, if anything, right now we need to take greater risk.

In other words, policy-makers and banks, and with public support, are doing the opposite of what Joseph did.

You probably know, banks create credit. They lend out more money than they have on deposit. The ratio of lending to cash on deposit and in current accounts is called the liquidity ratio. The money supply is, to an extent, determined by all this new credit. In recent months the liquidity ratio has risen, so, effectively, the money supply has been falling. This is why the government needs to pump more money into the system. Our preferred options would be to see the government use this new money to lend directly to business, especially start up business, and in particular start up business formed by people who were previously unemployed. Alternatively, the government could use this new money to fund cuts in income tax, or better still a rise in personal allowances.

The money created in this way will be paid into banks. The banks will then have more cash, and so even with the new higher liquidity ratio will be able to afford to lend more.

Under these circumstances, the creation of new money will not be inflationary – rather, it will simply be replacing money lost as banks increase their liquidity ratio.

The danger lies in what will happen next. If, come the recovery, banks start increasing their lending again, and return to the kind of liquidity ratios seen during the last boom, then all this money created by the Bank of England will be multiplied out – and there will be far too much of it floating around the system. Inflation, maybe even quite severe inflation, will be the result.

That is why the time for tougher regulation isn’t now – when things are in free-fall, and banks are cutting back and being more careful anyway. The time for regulation will be at the point when the recession comes to an end. At that point, the regulator must ensure banks keep the reins on lending, and keep liquidity ratios down.

Unlike Joseph, banks were profligate when times were tough. This was a mistake. It would be another mistake if, now that times are tough, we start saving. Two errors won’t make things right.