The use of such tools may be helpful in these economies, but it also poses a potential risk to the rest of the world. For example, it could push even more capital flows in the direction of emerging economies like Malaysia. The crisis has also stretched the fiscal position of governments, both in the advanced and emerging economies. In some cases, such deterioration was related to dealing with the effects of the crisis (e.g., from bank rescues) and the low GDP growth post-crisis, in others it reflects the outcome of years of unwise fiscal spending. Whatever the reasons, constrained fiscal positions mean a reduced capacity to support economic activity and a reduced ability to deal with future crisis and shocks. It also means that monetary policy may be called on to do more than it can realistically deliver – a phenomenon we are already witnessing in the advanced economies. A related policy issue has to do with structural reforms. This is a topic that has been much discussed in the post-crisis years. The trans-Atlantic crisis was a blow-up of large imbalances and distortions – both real and financial – built over many  BIS central bankers’ speeches  3  years. It reflects policymakers delaying or ignoring needed reforms. The experience has once again provided the lesson that the longer such imbalances are ignored and allowed to pile up, the bigger the mess when the whole pile finally comes crashing down. Structural reforms are certainly needed in many of the crisis affected advanced economies.
Finally I discuss the impact of financial developments on the growth of money and credit and the significance of that for the broader economy. London’s impact on the wider economy In principle, when one sector of an economy enjoys rapid growth, we would expect to see three broad developments: •  rewards earned by factors which are specific to the booming industry rise;  •  unless there are sufficient unemployed resources available, productive resources shift into the booming industry; and  •  employment in other tradable goods industries falls. 1  Gieve, J “The City’s Growth: The Crest of a Wave or Swimming with the Stream”, to the London Society of Accountants, 26 March 2007. 2  I use “the City” here loosely to cover not just the Square Mile but the whole of London’s wholesale financial sector including in Canary wharf and the West End. A fuller exposition would also give more attention to successful regional centres including Edinburgh. BIS Review 73/2007  1  The results were illustrated by the Dutch experience with gas in the 1960s and by the UK experience with North Sea oil in the early 1980s. 3 In both cases, part of the mechanism was a rise in the real exchange rate and consequent pressure on other sectors. Is that happening now in the UK? It is much harder to identify the impact of the City than the impact of the discovery of gold or oil.