Importantly, some members of our constituency have been able to utilize the fiscal space arising from past reforms, which is a contributing factor behind the stronger demand in these countries. Nonetheless, the concurrent challenge is to keep inflationary pressures under control while ensuring that strong domestic demand does not lead to a build-up of imbalances. 4. Notwithstanding the baseline scenario, it is clear to us that the Fund is correct in identifying the financial turmoil as the single greatest risk to growth. In the US, given the loss of confidence, the immediate priority for the authorities was to limit the financial contagion and counter the downside risks to growth. Following that, the first line of defense was monetary policy and monetary operations to inject liquidity. The second line was fiscal stimulus. We view these actions as steps in the right direction, although one should also recognize the limitations of such policies at a time of impaired balance sheets and ebbing sentiments. The third line of defense was using public money to safeguard the stability of the financial system. In view of the systemic nature of the crisis and the potential for spillovers we appreciate the need for decisive policy actions and the drastic unorthodox measures. BIS Review 51/2008  1  Indeed, our own experience during the Asian crisis was that adherence to a market-centric philosophy in an environment where markets have seized up is simply not tenable.
xxi  Chart 11: The UK bond-equity correlation has turned negative for the first time ever Correlation 0.8  0.6  0.4  0.2  0.0  -0.2  -0.4 1759  1809  1859  1909  1959  2009  Source: Thomas and Dimsdale (ibid.) and Bank calculations. Line shows ten-year trailing correlation of monthly returns on UK equities and consols. See also Roberts-Sklar, M. (2016), “250 years of the bond-equity correlation”, Bank Underground, 20th October. This unprecedented desire for safety has helped to drive down the equilibrium interest rate – the interest rate central banks must deliver in order to balance demand with supply and so achieve stable inflation. In this sense, low policy interest rates are not the caprice of central bankers, but rather the consequence of powerful global forces, including debt, demographics and distribution. xxii  9  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  9  Those same forces are contributing to deficits in defined-benefit pensions. The value of these schemes’ investments in equities and real estate are low relative to the level of interest rates because investors are valuing safety much more than they are expecting faster growth. Said differently, since pensions are future claims on the economy, there isn’t a parallel universe of higher interest rates, higher growth and equity prices, and lower pension deficits. That is, there isn’t without real structural reform. Blaming monetary policy avoids these hard truths.