–  The transmission of monetary policy can be affected by risk appetite, and can itself affect risk-taking behaviour, domestically and globally. We need to be alive to that in forecasting the path of nominal demand, and in assessing global liquidity conditions. –  We also, therefore, need macroprudential regimes to ensure that these mechanisms do not lead to stability-threatening indebtedness or otherwise endanger the resilience of the financial system. We need, in particular, to be ready to contain private sector liquidity creation even when it is not driving excess nominal demand growth. That will amount to arresting occasionally the expansion or leverage of the banking system and shadow banking sectors. –  Given its special role in international finance, the UK owes a special responsibility to the rest of the world to maintain the safety and soundness of the UK-resident financial system. It is therefore very welcome that the IMF has reached precisely that view in its new work on Spillovers.26 The Fund must ensure that we stick at it. –  Reciprocally, the Fund needs to go back to the Draghi Report and incorporate its lessons into Article IV and FSAP reports. –  As the Draghi Report stressed, we must try to identify and remove microeconomic incentives that distort risk-taking behaviour into dangerous channels. And given the interconnectedness of global finance, we – especially in the UK – must be alert even to such distortions elsewhere. US housing finance was a domestic system whose structure led to problems with global spillovers.
It means being ready temporarily to raise regulatory requirements above their minimum level when risks from the economic and financial environment exceed anything remotely calibrated into the standards that apply in broadly normal conditions. And it means promptly relaxing those extra requirements once the risk to stability has passed. This is a massive step. No one is pretending that the policy community knows how to cast it in terms of a numerical target or a uniquely useful set of indicators, against which society can monitor us. And that underlines the importance of Parliament itself approving the instruments granted to the FPC, and of our being sufficiently transparent to enable public scrutiny of and debate about our analysis and policy decisions. The Bank/FSA Discussion Paper on macroprudential instruments published last December was a contribution to that.25 Back to current account imbalances: they do matter But that is not all that we, policymakers, should be modest about. If, as I believe, macroprudential policy can prospectively fill a gap, we must not pretend that it can be a cure for everything. Even if we had avoided the worst consequences of seriously suboptimal gross capital flows – a badly overlevered banking system dependent on flighty wholesale funding – there would still have been the problem of unsustainable global current account imbalances. Whether the eventual adjustment would have been disorderly and how costly is hard to tell.