Over the same period, core CPI inflation has fallen from average annual rates of over 6% to 2%. One important sign of underlying change is that the volatility of economic fluctuations has declined since the mid-1980s, evidenced by the fact that there has been only one recession in the United States in the past 17 years. Improved macroeconomic policy management and such positive supply factors as generally lower commodity prices certainly have contributed to the strong performance of the US economy in recent years. Also critical has been the emergence of new technologies, specifically the adoption of “just-in-time” inventory systems, which we copied from Japan. Research at the Federal Reserve Bank of New York suggests that these new inventory systems have helped account for a significant reduction in the magnitude of inventory swings and hence less volatile growth of the US economy. The spate of recent announcements of new resource management systems by auto companies, retailers, and others suggests that we have not yet exhausted the potential benefits from such inventory and production systems. These inventory and production management techniques are just one aspect of the most significant factor that has characterized the improved performance of the US economy, which is non-farm business productivity growth. As I have noted, this had averaged about 1½% a year over the previous 20 years, but since 1995 has improved steadily.
Road shows to investors in the US and Europe ceased to be the preserve of the international giants and became common among smaller players whose whole asset base was in the UK. As the difficulties in the financial system have persisted and worsened, it has become clear that these developments have created real structural weaknesses in the banking sector. In particular: •  inflated aggregate balance sheets, whose expansion had outpaced growth in the real economy;  •  expansion into assets whose underlying value, credit quality and liquidity were uncertain;  •  liability structures which were overly reliant on sustained availability of wholesale funding whose maturity was often short;  •  capital and liquidity buffers which became too low , given these asset and liability risks; and  •  underappreciated, but potent interconnections between firms in the global financial system. Policy response For most of the last year, the Bank has adopted a twin track approach, as part of the Tripartite partnership with the FSA and the Treasury. The first track has been to provide liquidity to the market in order to give most banks time to make the necessary adjustments – including by raising capital. That has involved an increasing range of measures including long term repos on a wide range of collateral and the introduction of the Special Liquidity Scheme which allows banks to swap illiquid assets for Treasury Bills for periods of up to three years.