Does anyone honestly think another VAT cut would cure economy? Interest rates have been cut close to zero, and the patient still barely stirs. Nor can the Bank of England be accused of stinting on quantitative easing, having already bought up a quarter of the national debt. Since the crisis began, the Old Lady has expanded her balance sheet more than any other central bank in the western world. Minutes to the last meeting of the Monetary Policy Committee, published yesterday, reveal growing support to do even more, even though there is as yet little evidence that QE has any effect other than to lower the Government's borrowing costs and damage final-salary pension schemes. QE has nevertheless become the default growth policy of choice, a process engaged in more for the sake of being seen to act rather than any real belief in its efficacy. There is no deflationary threat to the UK economy right now that might justify further QE. It's more than possible that implosion in Europe will soon produce one, but with broad money growing at trend rate again and inflation still well above target, for the moment, there is no such phenomenon. Britain's economic problems are of a different pedigree. And we've also tried fiscal stimulus. Beyond destroying the public finances, there's been no permanent dividend from that either. Unreconstructed Keynesians argue that there was nothing wrong with the policy - it's simply that it wasn't big or sustained enough. Britain started consolidating too soon, they insist, as if running persistent 11pc deficits in peacetime is a perfectly normal way of going about things. Come to think of it, maybe it is. Japan has been doing it for decades, but does anyone honestly think this a model you would wish to emulate - virtually nil growth for 20 years and public debt at 240pc of GDP? In Japan, repeated rounds of fiscal and monetary stimulus have failed to revive the patient as hoped. Yet they have become a way of life, thus meeting Albert Einstein's famous definition of madness - doing the same thing over and over again and expecting different outcomes. Why does anyone think it would work here in Britain? A well-known Keynesian principle is that the time for austerity is in the boom, not the bust. It's hard to disagree with such contra-cyclical thinking. The problem is that we didn't have any austerity in the boom. To the contrary, what we had was a pro-cyclical, credit-fuelled spending binge. At all levels, credit was used to compensate for a steady loss of relative competitiveness. There's nothing in the kitty to spend in the bust. In a recent article, Raghuram Rajam, a former IMF chief economist, put it like this: "For decades before the financial crisis in 2008, advanced economies were losing their ability to grow by making useful things. But they needed to somehow replace the jobs that had been lost to technology and foreign competition and to pay for the pensions and health care of their ageing populations. So in an effort to pump up growth, governments spent more than they could afford and promoted easy credit to get households to do the same. It is not immediately obvious that a crisis caused by too much debt can be solved simply by interfering in the natural process of adjustment and taking on even more of it. At best, such actions can only smooth and elongate the adjustment to living standards. There is surely something to be said for getting it over and done with, rather than, as in Japan, stretching it out over decades. But nor am I suggesting that the authorities sit back, do nothing and let the adjustment take its toll. One of the key reasons the economy is failing to respond to therapy is a still deeply impaired banking system. Banks won't lend because they know they still have a mountain of bad loans on their books waiting to be recognised. Until the bad debts have been cleared, the banks won't start functioning properly again. Both directly and through its agent, the Bank of England, the Government should be using the strength of its balance sheet to take these bad debts entirely off the table. The credit risk should in effect be nationalised, allowing the banks to start over with a clean slate. Through Tarp and Federal Reserve purchases of mortgage debt, the US has grasped this nettle in a way Japan never did. Britain won't solve its crisis by cutting VAT, the only real beneficiaries of which would be the Chinese and German export machines. Cure the banking system first.