But the economic outcomes have been dramatically worse. A key difference here is that property price rises – unlike big rises in equity prices – are invariably accompanied by big increases in debt. So when property prices fall they are more likely to create solvency problems – and funding problems associated with heightened solvency risks – than when equity prices fall. My colleague Adam Posen recently presented evidence that big falls in equity prices in themselves generally do much less damage than big falls in house prices. He found that the average output loss after real estate booms cumulates to over 5% of GDP over five years, and in 75% of cases at least 2% of output is lost. For equity price booms and busts, there is no output loss on average over five years, and following them only 25% of economies experience a loss of more than 4% (Posen 2009). What has happened to the hedge fund sector during this crisis is also illuminating. In Q4 2007, total assets held by hedge funds were around $ and aggregate equity capital (or what the industry refers to as assets under management, AUM) was around $ This implies that the hedge fund sector had an average leverage of around 2.8, compared to typical banking sector leverage ratios at that time of 30 or more.
The Bank of England now has extensive powers as a micro supervisor of individual firms and a macro supervisor of the financial system as a whole. Parliament has set objectives for both – primarily, safety and soundness for the PRA,  4  BIS central bankers’ speeches  and the resilience of the system for the FPC. But unlike in monetary policy, we do not have a quantified target – and, to be clear, we do not think that that would be possible. To have such power with limited transparency would be uncomfortable. If nothing else, it would leave the Bank in a position where supervision was of interest only when it obviously goes wrong. We need to engage society – public, Parliament – in debates about the resilience of the financial system and how we are supervising it in the good times as well as in bad times. The FPC and PRA have already taken various steps to help with this – the six-monthly Financial Stability Review, the published Record of FPC policy meetings, the Committee’s statement on the use of its directive powers, the PRA’s Approach document and annual report, and so on. But stress testing can provide a quantum leap in transparency and accountability. For example, the FPC will need to be able to defend its choice of stress against questions and criticisms that the scenarios are too extreme or not tough enough. That will implicitly be a healthy debate about objectives.