Different jurisdictions will come up with different arrangements to address this issue, but I would say that every jurisdiction is going to need its own solution. And, perhaps for the first time, that has highlighted the need for some international co-ordination of policies on shadow banks. The FSB is just starting to explore this virgin territory.21 Asset managers and incentives The vast majority of the asset management world is not engaged in shadow banking and, more important, does not of itself jeopardise the stability of the system directly if it gets into trouble. The taking and absorption of risk by unlevered funds is a fundamentally healthy part of the system. But financial stability authorities cannot be indifferent to this industry. By investing in the debt and equity of banks, it is a vital part of market discipline. We do not want – and cannot have – a system where the first line of defence after the management of banks themselves is the cadre of official sector supervisors. For the system to be healthy, we need boards, auditors, equity investors and debt holders to play a big part, and for investment decisions to be subject to constructive incentives. Yet, there is relatively little debate about whether the incentives of asset managers made the system more prone to crisis. Although not a subject for today, an important part of this is the drive to develop resolution regimes that entail debt holders taking losses on their exposures to distressed banks and dealers.
A more detailed description will be provided by Professor Lars Jonung. Economists of the time could not, based on historical evidence, predict that national and international monetary systems would be facing substantial disturbances that would push up the price level considerably and lead to extensive instability. With the First World War, the gold standard was suspended and the money supply and price level rose sharply. The deflationary policy of the 1920s brought the price level down, but probably also contributed to instability. The price level rose again during the Second World War, when the occupying powers used the printing press to finance a substantial portion of their expenditure. The economic policy of the 1970s and 1980s contributed to high inflation. So, how well would economists in 1905 have predicted the Norwegian level of real income in 2005? BIS Review 43/2005  1  They would have been off the mark here too. They were not in a position to predict that the growth rate in the Norwegian and global economies would rise as a result of considerable technological progress, restructuring and higher productivity. On the other hand, they could to some extent have predicted our current industry structure based on their economic history. From 1865 to 1900, primary industries’ share of total GDP fell from about 34 per cent to 22 per cent. In the same period, manufacturing, other goods production and service industries accounted for an increasing share of total GDP.