But these effects are longer-lived in a secular stagnation world. It is quite possible that we are in some combination of both worlds. But I think it is important, especially when thinking about policy, to distinguish the different forces that drive these respective stories about the world. The UK picture Which brings me to the UK. When I joined the MPC over two years ago, the data seemed to point quite firmly towards the healing story. The UK was experiencing a burst of growth, driven by the return of credit and confidence and pent-up demand from the recession and slow recovery. Many commentators were arguing that the Bank was in danger of getting behind the curve; these arguments grew louder as unemployment fell at its fastest rate for 40 years. The Bank’s forecasts two years ago suggested that growth would fall back a touch, but only a touch, to around its pre-crisis average of 0.7% per quarter. Our forecast for growth in 2014,15,16 was 3.4%, 2.7% and 2.9% respectively. The reality has confirmed part but only part of that story. Over the course of 2014 and 2015 growth drifted down, slowly but consistently and by more than forecast. The economy grew at around 2% annualised in the last quarter of 2015 – around 0.7 percentage points lower than the February 2014 forecast; growth in 2015 was 0.2 percentage points lower. The Bank’s most recent forecast is for growth to pick up slowly over the next few years to 2.5%.
Change is, I believe, inevitable. The question is only whether we can think our way through to a better outcome before the next generation is damaged by a future and bigger crisis. This crisis has already left a legacy of debt to the next generation. We must not leave them the legacy of a fragile banking system too. I have explained the principles on which a successful reform of the system should rest. It is a program that will take many years, if not decades. But, as Bagehot concluded in Lombard Street, “I have written in vain if I require to say now that the problem is delicate, that the solution is varying and difficult, and that the result is inestimable to us all.” References Admati, A.R., DeMarzo, P.M., Hellwig, M.F., and Pfleiderer, P (2010), “Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital regulation: Why Bank Equity is Not Expensiv” Stanford Business School, mimeo. Arrow, K.J. (1951), “An extension of the basic theorems of classical welfare economics”, In Proceedings of the Second Berkeley Symposium on Mathematical Statistics and Probability, ed. J. Neyman, Berkeley: University of California Press, 507–32. Arrow, K.J. and Debreu, G. (1954) “Existence of an equilibrium for a competitive economy”, Econometrica 22, 265–90. Bagehot, W. (1873), “Lombard Street: A Description of the Money Market”, Wiley & Sons, (reprinted 1999).