On one side, economists at the Bank for International Settlements (e.g. White, 2006), argued that monetary policy was too loose and should instead “lean against the wind” of a credit/asset-price boom in order to reduce risks further down the road. On the other side, people such as the Chairman of the Federal Reserve, Alan Greenspan (2002), doubted the feasibility of such an approach and advocated a policy of benign neglect during the boom phase, along with aggressive relaxation should there be a collapse of asset prices. As I noted some years ago (Bean, 2003), such “leaning against the wind” is in principle compatible with flexible inflation targeting: a central bank ought to be willing to undershoot its inflation target temporarily, if it believes that it will thereby improve its chances of meeting the target later on by avoiding a disruptive bust. The crisis and subsequent Great Recession seem to make this logic even more compelling. But unfortunately, by the time an unsustainable credit boom has been diagnosed, a small increase in policy rates is unlikely to do much to cool it. And a large increase is likely to generate unacceptable collateral damage to the real economy. In a paper for the Federal Reserve’s annual conference at Jackson Hole a couple of years ago (Bean et al., 2011), I reported the results of some simulations of what might have happened if Bank Rate had been 200 basis points higher during the four years before the crisis began.
This formulation mirrors that for the Monetary Policy Committee and should ensure that the FPC approaches its primary objective of ensuring resilience of the financial system in a way that does not unduly impede economic growth. Seven of the members of the Committee, including myself, are drawn from within the financial authorities: the Bank of England and the Financial Services Authority (FSA). 1 The remaining four are external members who bring special expertise and experience and can  1  At present they are: the Governor; the two Deputy Governors; the executive directors for Financial Stability and for Markets; and the Chairman and Chief Executive of the FSA. When the FSA is dissolved into the Prudential Regulation Authority (PRA), which will be part of the Bank, and the Financial Conduct Authority (FCA), these last two will be replaced by the heads of the PRA (who will be a third Deputy Governor of the Bank) and FCA. 2  BIS central bankers’ speeches  reduce the risk of the “group think” that might arise in a committee comprised solely of insiders. There is also a non-voting representative from the Treasury. The powers of the Committee are two-fold. First, the FPC can issue recommendations. These could be general recommendations, for instance to financial institutions or the Treasury. Or they could be specific requests to the prudential or conduct regulators who would then be expected to comply with the recommendation or else explain why not.