Eventually, last month, far from tightening, the Board actually eased policy slightly – though by then, of course, the forecasts had changed materially from those of six months earlier. This was not a repudiation of the forecasts, nor a sign that forecasts are not useful. The process of forming forecasts remains key to the forward-looking conduct of policy.
Back then, there were many – but not among supervisors or academics – who believed that there was a one-to-one relationship between profit and risk. We now know this: sustainability is what counts. And sustainability cannot exist in an environment of very high volatility. Those who desire more sustainable profitability and business models have to put stricter limits on proprietary trading.