But given that some of the beneficiaries of house price falls do not yet have independent incomes, and others have a longer period ahead to consume their additional wealth, on balance I would expect the net effect on consumption to be negative. More widely I would expect some impact from the end of a wide perception that in housing you can have your cake and eat it – that the return on your house as an investment will in time substantially offset the cost of housing as a service. All these feedback channels are at work and economics is better at identifying their nature than in forecasting their scale. There is no alternative there to reviewing all the indicators I have mentioned month by month and then making an informed judgment. Some policy lessons for the medium term We identified the mispricing of risk, particularly in credit markets in our Financial Stability Reports over the last two years. But the reckoning has been more severe and destabilising than anyone anticipated. Risk premia had become compressed and leverage throughout the financial markets had risen too high. The pendulum has now swung back with a vengeance. As the FSR noted earlier this year, risk premia now appear to have overshot in some markets and that is contributing to the slowdown in the real economy. Could policymakers have taken earlier action to correct those imbalances? Of course we took the decisions we did on the basis of the available data at the time.
Outside the UK, the model of independent regulators with mandates making rules is common practice in most other jurisdictions. The need for operational independence is reflected in the Basel Core Principles for banking supervision.8 All jurisdictions represented in the Basel Committee implemented the Basel 3 reforms through regulators’ rules or guidelines rather than primary legislation, with the exceptions of the EU, with its very specific supranational structure, and Switzerland, with its unique federal structure. Details of the FPC’s objectives and primary responsibilities are set out in section 9C of the Bank of England Act 1998. In particular, the FPC is charged with ‘the identification of, monitoring of, and taking of action to remove or reduce, systemic risks with a view to protecting and enhancing the resilience of the UK financial system’, but this does not ‘require or authorise the Committee to exercise its functions in a way that would in its opinion be likely to have a significant adverse effect on the capacity of the financial sector to contribute to the growth of the UK economy in the medium or long term’. For a more detailed discussion of the FPC’s mandate, see my colleague Alex Brazier’s May 2019 speech, ‘Citizens in service, not people in power’, available at https://www.bankofengland.co.uk/-/media/boe/files/speech/2019/citizens-in-service-not-people-in-power-speech-byalex-brazier.pdf.