The RBA is to be applauded by responding not meekly but forcefully to the financial crisis, with a full 1% cut in its rate. At the same time, this is an admission of failure. Its previous exclusive focus upon controlling inflation has been abandoned, even while inflation is still allegedly rising.

However, better this bold move than a half-hearted acknowledgement that things aren’t quite working out they way they expected. Keynes, when once challenged that his views on some issue were no longer consistent with his previous utterings, replied: “When I am proven wrong, I change my mind. What do you do?” Glenn Stevens and his colleagues have shown Keynesian courage to so decisively break with their previous obsession with the rate of inflation.

But as much as the RBA and other Central Banks around the world are responding decisively to this crisis, they bear responsibility for the fact that we are in one. Their primary purpose was to prevent another Great Depression. We are not in one-not yet, but a key pre-condition for one has developed right under their noses: excessive private debt. Compared to income, debt levels today are twice as high as in 1929, which is why this financial crisis is causing far more carnage than 1929 did.

At the time of the stock market crash of October 1929, the US’s debt ratio was 150%; today it is 290%. Australia’s ratio was 64%; today it is 165%. The regulators who were supposed to keep us from the jaws of The Beast have instead led us closer towards its belly.

This was not, of course, a conscious decision. It has happened because Central Banks are run by economists, and the dominant “neoclassical” faction within economics ignored the real lessons of the Great Depression.

The false lesson that neoclassical economics preaches is that the market economy is fundamentally stable, and the Great Depression was caused by the monetary authorities tightening credit in the aftermath to the Stock Market Crash, rather than loosening it.

The real lesson of the 1930s is that a credit-driven market economy is fundamentally unstable, and a great depression occurs when debt-financed speculation results in excessive private debt at the same time as inflation is low. The excessive debt causes a chain reaction of bankruptcies, and falling prices mean that the real burden of debt rises, even as borrowers desperately tried to reduce their debt.

Central banks, under the misguidance of conventional economic theory, instead reinterpreted their charters — which emphasised full employment — as a mandate to keep inflation low. With their neoclassical eyes fixated on the rate of inflation, they ignored the expansion of private debt. This is why the sudden collapse of the world economic order took economists by surprise. They were looking at their mathematical models, which ignore private debt (and indeed money!), rather than at the real world, where debt is king.

We may yet rue their success in reducing inflation from its serious levels of the 1970s to the comparatively trivial levels of today. When the Stock Market crashed in 1929, the inflation rate was under 1%; two years later it was minus 10%. As a result, the real debt burden on the economy soared. America’s debt ratio blew out from 150% to 215%, while ours rose from 64% to 77%.

With twice the debt level prior to the Depression, the last thing we want to find now is that inflation turns negative. If that happens, then Central Banks will have caused what they were supposed to prevent.