Kahneman, D (2012) ‘Thinking, Fast and Slow’ Penguin See Carney (2015) ‘Three Truths for Finance’, Remarks given at the Harvard Club UK Southwark Cathedral dinner, London. http://www.bankofengland.co.uk/publications/Pages/speeches/2015/843.aspx 5  7  All speeches are available online at www.bankofengland.co.uk/speeches  7  It has been bolstered by two important institutional innovations since the crisis. The first is the handing of responsibility for the supervision of individual banks and building societies to the Bank of England. That has meant a change in approach to supervision, to one that’s prepared to make judgements about risks and act pre-emptively. The second is the creation of a new authority in the Bank – the Financial Policy Committee – with new powers, tasked by Parliament with monitoring risks in the financial system that could cause problems for the wider economy and with doing something about them. This has been christened ‘macroprudential policy’. Macro because it’s focussed on the wider economy; prudential because it’s about protecting that wider economy from excesses in the financial system. It is the institutional memory of the financial crisis; designed to hardwire into the system the vigilance to growing risks and the imagination of their consequences that were so dangerously absent before the crisis. In short, someone has the job of worrying intelligently. Is the same movie already playing again? Now let’s turn to the movies. The old classic, Debt Strikes Back, in which the spiral of complacency upends the economic galaxy, has been seen many times before.
It is this complacency that prompts lenders to make credit cheaper. They think they need less compensation for risk. Interest rates on their loans come down and terms become looser. As it becomes cheaper, credit is taken up more widely. As mortgage debt expands, house prices rise. Lenders think borrowers have more valuable houses against which to secure mortgages. And as terms and conditions ease up, it becomes easier to service debts. More borrowers get access to consumer debt and make their repayments. Credit scores improve. Lenders then think they’ve really cracked it. What Governor Carney has described as the four most expensive words in the English language start to be heard: “This Time Is Different”. 5  The spiral continues and borrowers rack up more and more debt. Lending standards can go quickly from responsible to reckless. The sorry fact is that as lenders think the risks they face are falling, the risks they – and the wider economy – face are actually growing. So the safety of the economy needs a further defence line beyond the lenders; a defence line that guards against this spiral of complacency, and that takes account of the full, collective effect of individual decisions on the wider economy. That line is regulation – a defence line that was, frankly, missing in action in the run-up to the financial crisis. 4  This is a form of the ‘optimism bias’ documented by Daniel Kahneman.