For one thing, I’ve focussed on a sector in which the UK looks already to have had a comparative disadvantage in the 1970s. If you start as net importer of a particular good, the benefits of lower prices will 4  necessarily outweigh the costs . More generally it’s very difficult to construct a scenario in which free trade is not a net benefit, certainly for a relatively small economy like the UK. But the position is less clear than in  4  If you produce Y of some consumption good and consume C of it, the net income effect of a price change ΔP is ΔP(Y-C). The difference between domestic production and consumption, Y-C, is the trade balance. So if you happen to be a net importer of the good (Y<C) a drop in international prices makes you better off: all else equal, it boosts your “terms of trade”. 7  All speeches are available online at www.bankofengland.co.uk/speeches  7  Chart 7 if a country already open to trade is faced with a fall in prices in a sector where it has a comparative 5  advantage . Second, you might well object to such a crude, utilitarian comparison anyway. The gains are distributed across lots of people, the losses – such as they are – visited on only a few. Even if aggregate employment seems unperturbed by those sectoral job losses, and even when there are big net income gains in aggregate, that doesn’t mean no individual will have lost out.
Another effect of financial innovation is thus to create asymmetries in the reaction of the economy to monetary policy: for example, the slow build-up of bubbles during periods of monetary easing followed by an abrupt retrenchment when monetary policy tightens. Note that there is currently a debate as to whether this inherent procyclicality of financial systems is amplified by our accounting and prudential regimes. Fourth, it may be that modern financial innovation creates new discontinuities in the financial system and dynamics. When conditions are less benign than usual, the transmission process along the interest rate curve becomes non-linear: a striking feature of this summer’s events was the surge in the short-term money market. Wider and variable spreads between term funding rates (of which many bank loans are priced off) and policy rates may reduce the efficiency of interest rate adjustments when needed. Innovation also reinforces the mechanism of the "financial accelerator", through which the level of asset prices influences credit distribution (through collateral values and, now, its impact on banks tier one ratio), then the real economy; and, in return, the real economy impacts asset prices and values. This spiral can go upwards, or, as we see now, downwards. Overall, I believe that central banks have coped well with these challenges over the past ten months. The monetary policy response has differed across industrialised countries, as warranted by the differences in economic situations and outlooks.