Moreover, I am firmly convinced that growth in an economy is what ultimately underpins a healthy society. It is simply not possible to have a strong society with a permanent underclass. No society - not our own nor any other - can hope to flourish if its youth are left unemployed and a large segment of its population remains poorly educated and inadequately housed. Nor can an economy grow without a basic infrastructure that enshrines the rule of law and the accountability of the government to its people. As I survey the world economy today, I am pleased that there seems to be broad-based recognition of these fundamental precepts. World economic conditions are considerably more benign than they have been in years as we begin the new millennium. How do things look outside the United States? Let’s start with Japan. When we look at Japan’s growth in the 1990s, we really see two patterns. One is the sluggish growth since 1992, the other is the steep recession in 1998. The 1998 recession stemmed from the financial crisis in a number of other countries in Asia, leading to a collapse in corporate profits and business fixed investment, and essentially a credit crunch as financial restructuring got under way. Japan today is in the difficult phase of restructuring, with high unemployment as balance sheets are being cleaned up in the corporate and banking sectors. Moreover, business investment was slow up to the fourth quarter of 1999 and consumers have been restrained in their spending.
(ii)  It was also difficult to decide the appropriate spread to charge for lending against wider relative to narrow collateral, to mitigate adverse selection and the moral hazard risk. A minimum 50 basis point spread was applied for wider collateral. (iii)  Those long-term repos exposed the Bank and the commercial banks to significant interest rate risk. That is because commercial banks’ reserves balances were being remunerated at Bank Rate but the minimum bid rate in the LTRs was the fixed  10  The narrow and wider collateral sets were redefined in February 2011. The changes will take effect from 1 July 2011. See http://www.bankofengland.co.uk/markets/marketnotice110211.pdf for more details. 11  For more information about changes in the Bank’s balance sheet in response to the crisis, see Cross and Fisher, “The Bank’s balance sheet during the crisis”, Bank of England Quarterly Bulletin, 2010 Q1. 6  BIS central bankers’ speeches  3-month market (OIS) rate at the time of the operation (plus the spread for wider collateral). So when Bank Rate was cut much more rapidly than was anticipated by the market during Autumn 2008, the Bank recorded a large, unintentional surplus (and the banks a corresponding loss).12 In order to try to resolve these issues, the Bank enlisted the help of Paul Klemperer from Nuffield College, Oxford, an expert in auction theory, to help re-design its long-term operations.