Having started with Mark Twain I want to finish with another quote this time from Santayana: “A man’s memory may …become the art of continually varying and misrepresenting his past, according to his interests in the present.” 1 One lesson from recent events is the need for rigour, balance and transparency in policy making and risk assessment. I hope that the Bank can play a part in that in future as it has in the past. 1  “Reasons and places”, George Santayana. BIS Review 132/2008  5  Chart 1: Financial market liquidity  Chart 2: Household consumption growth: what happened to the boom? Liquidity index 1.0  Percentage changes on a year earlier 10 1973 Q3 1980 Q1 1990 Q3 2008 Q3  0.5 + 0.0  8 6 4  0.5 2  1.0  0  1.5  -2  2.0  -4 -6  2.5 92  94  96  98  00  02  04  06  08  -16  -12  -8  -4  0  4  8  12  16  Quarters  Sources: Bank of England.
And many market participants were also expecting a correction at some point; but they generally felt they were well placed to handle it. In fact the severity and breadth of the downswing has surprised markets, commentators, and policymakers alike. In the light of subsequent developments, a number of commentators have concluded that the problem was simply a lack of attention and short memories. I don’t think it was quite as simple as that. I am with Mark Twain who said "History doesn't repeat itself, but it does rhyme." While the current crisis has some similarities to previous downswings – in the early 90s or of the 70s for example – there are some significant differences too. For example the last three recessions in the UK (in the 70s, 80s and early 90s) were preceded by sharp rises in consumption and activity and earnings to well above sustainable rates. As Chart 2 shows that was not true of the last few years when consumption, output and earnings all seemed unusually stable. Again in previous recessions, stress in the banking sector has tended to follow on from defaults and losses on domestic loans as interest rates rise and the economy slows down. But this time the downturn started in the banking sector – last summer when losses in the US property market not only led to losses in UK banks trading and treasury books but closed important sources of finance to them. The downturn in the housing market and then the wider economy followed.