I encourage you to read the whole speech. As Anthony has pointed out, it is a very interesting political phenomenon in itself: an independent public servant is reporting to a democratic group that is not on the inside of the Westminster system. It provides a very nice contrast to the faux-populism of the economics sections of Clegg's speech to his party conference. Why, I immediately wondered, couldn't Clegg have told the economic facts straight-forwardly and seriously, as King did?

Why the condescending analogies to the household budget from Clegg? King condensed the subtlety of our predicament pretty clearly. First, his analysis of the crash: global imbalances (i.e. Asian trade surpluses) combined with a very badly incentivised financial sector (i.e. lots of sharp practices and poor control) to create mis-selling, mis-pricing of assets on a massive scale and absurd increases in financial sector leverage.

We've got to fix the imbalances through global economic governance and the financial sector incentives through regulation. King apologises that those who are suffering are not those who caused the problem. Quite right. Getting incentives right in finance will not only be important for the larger, stability reason that it was mis-selling, short term bonus-chasing etc that was a necessary condition for the crisis. It will be important also for a sense of justice having been done. You can't have the widely spread pain of deficit cutting – King explains that this really is necessary, and I am inclined to believe him (here I disagree with my colleague Guy Aitchison, though see below the note on money-creation) – without also exacting revenge. Hence the very public noises about going after tax-cheats and warnings from Cable about cleaning up the corporate board room.

Don't get me wrong. Free market capitalism needs to work "like it says on the box" – as a servant of the public good – and not with some simulacrum of competition hiding greed-fueled iniquity. The financial sector is too big, riddled with hidden subsidy, too close to power, hooked on special treatment, preserved by informational monopolies, part of a back-scratching sub-culture and all these aberrations that have no place in the world of Adam Smith – nor even in the world of any serious contemporary justification for capitalism. It needs fixing. But the coalition also needs to show that the perpetrators of recession are punished. (Maybe the City knows this and will award itself large bonuses in order to properly set up the theatre of punishment.)

Back to King. He says, importantly, that we don't know whether the deficit cutting plan is too rapid. What if it is? Well,

But if the recovery is slower than expected then the automatic fiscal stabilisers - the lower tax receipts and higher spending that result from weaker growth - will act to stimulate demand. And monetary policy can react too, especially when there is a credible plan to reduce the deficit.

The last of these is the important one. It is the big difference – that Clegg failed to mention – between the household budget and the nation's: the nation can, within reason and being very careful about it, issue its own currency. That's because it cares about the level of activity within the nation, whereas the domestic budget is only about its trading relations with the rest of the world. Read the masterly Krugman on how this all works. If the cuts in the deficit make the economy slip into recession, the Bank of England will pump money in. There is a real issue – I have written about it over here, Balancing on a Cable – on the question of the transmission mechanism (how to pump in money so that it gets spent). My own view is that the Bank of England should simply send a £100 cheque to the poorest 10% of households next time it wants to pump £200m of cash into the economy. The worry with this policy is inflation. But the world and the UK economy appear to enjoy spare capacity. They certainly will if the UK and its trading partners tip back into recession, which is the case we're considering.

King is clear in his speech: the deficit needs to be cut, and there needs to be a credible plan in place to do so. But he agrees that cutting might have been a bit slower; importantly, he also agrees that it is not his job to say whether the cuts ought to have come from higher taxes or less spending. This – more than the timing of cuts, or some old fiscal vs. monetary policy debate – is the big political question that has been resolved, as we know, by few tax rises and huge spending cuts. I presume that this is Guy's real disagreement with the coalition. It is not about Keynesianism vs. some other macro-economic stabilisation program; it is essentially about the size and role of the state. The trouble is that the political question has been presented as a response to crisis and not as an important question in itself.

I think what the critique of cuts leaves out is the nature of the state: what we need and do not yet have is a state that deserves to be large. There are different reasons for cuts (again, hat-tip to a v.useful conversation with Anthony Barnett on this):

• bad and wasteful Labour programs that needed to be cut (eg the Database State stuff, Trident renewal ...)
• the austerity cutting to deal with the deficit; even if more revenue had been raised through tax increases, it would have been hard to argue that the public sector should be wholly insulated from the pain
• there are some parts of the public sector that genuinely need reforming: pockets of gold-plated public sector packages that no longer seem fair; also pockets of the public sector that need to work better
• ideological cuts – mainly coming from rather unreconstructed Thatcherites in Osborne's team – that Tea Party-ishly want a smaller sate .

I have no sympathy with the last of these, but all the others seem important. The real pity, though, is that Clegg and the coalition refuse to acknowledge that some of the cuts are about reforming what the state is like. The language of crisis is being used to justify everything. (Hence the particularly pernicious nature of the deal that the BBC made with the government to avoid being too negative about the cuts in its reporting: if there is no alternative to cuts, there is no point in debating them in the public media; all that is left to do is report on them.) If the nature of the state is going to be changed – and I agree that it ought to be – then we need to have a proper political process to decide on the change, and not be pushed into it by supposed crisis.

The manager's temptation to use a budget crisis to push through a reform agenda is very understandable. I have used the trick myself. But democratic government is not management. The best of technocracy was on display with Mervyn King in his speech to the TUC. But he understood that technocracy needs to hand over to politics when decisions about final ends are at stake. "Never waste a good crisis" has been a cynical mantra on all sides during the financial crash. But the solutions that come out of trying to use crises tactically will be bad ones: people will feel tricked into a new world and will have every reason to refuse to engage in its operation, however well conceived. It would be a pity for the Big Society to fail because it was introduced under the guise of deficit reduction rather than a new conception of the state. When you see a crisis coming, make sure that you waste it; otherwise, your cherished long term plans will be built on quicksand.