As Charles Goodhart forcefully argued, prudential policy faces a “boundary problem”: …effective regulation can penalize financial intermediaries within the regulated sector compared to those just outside, leading to substitution flows towards the unregulated.18 For example, when it comes to what we now call non-bank financial intermediation (formerly known as shadow banking) the growth of total assets in recent years has been higher than in traditional banking.
An important element in ensuring that we leave behind a stronger economy than we inherited, as did virtually all previous generations in this country, will be to move over time toward fiscal policies that are sustainable, efficient, and equitable across generations. Policies that promote private as well as public saving would also help us leave a more productive economy to our children and grandchildren.