4  It should also be borne in mind that the Asset Purchase Facility, the vehicle through which the gilts are purchased, is indemnified by the Treasury, while the Treasury will also receive any surplus that results from the transactions. Consequently the coupon payments on the gilts, net of the interest on the bank reserves used to purchase them, is ultimately owned by the Treasury; they are not “lost” to the taxpayer in any sense. 5  Making the monetary financing permanent by cancelling the gilts independently of the economic environment is essentially a step towards a world of “fiscal dominance”, where fiscal policy constrains monetary policy and ultimately determines the price level, as in the classic work of Sargent and Wallace (1981). 8  BIS central bankers’ speeches  Chart 1: Total stock of UK debt by sector(a) Ratio to nominal GDP  Ratio to nominal GDP 8  2.4  7  2.0  6 1.6  5 4  1.2  3 2  Financial corporations (left-hand scale)  (b)  Non-financial companies (right-hand scale) 1  0.8  0.4  Households (right-hand scale)  0 0.0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011  (a) Includes deposits, bonds and loans but excludes derivatives. (b) Includes monetary financial institutions, other financial intermediaries and financial auxiliaries, and insurance corporations and pension funds.
By comparison, we are still in the Stone Age in respect of deploying macroprudential policies. There is lots of scope for academia to help us out here, on both the theoretical and empirical fronts. Even so – indeed, in large part because of that state of relative ignorance – I think one can lay out some key principles that should govern the deployment of the FPC’s tools. It will be very easy for the future FPC, particularly during long periods of tranquillity, to slip into the temptation of neurotically twiddling the dials on its instruments or issuing recommendations left, right and centre. But what will determine the worth of the FPC will be whether it is successful in heading off the really big risks – in other words, avoiding a repeat of the sort of crisis we have just experienced. Ensuring resilience, rather than fine-tuning the credit cycle, must be the name of the game. Second, when the FPC does find it necessary to act, it will need to show resolution in taking the punchbowl away as the party is just getting going. With recent events so fresh in everyone’s memories, this may not seem much of an issue now. But in a decade or two’s time, when recent events have receded into history, such actions will be less welcome. No doubt there will be plenty of people willing then to claim that “this time is different” and that the FPC’s actions are unnecessarily inhibiting growth.