In the event domestic consumption growth has continued to hold up pretty well; but it has done so inevitably - on the back of a rapid build-up in household indebtedness, including mortgage debt, which in turn was associated with a sharp acceleration in the rate of increase in house prices - to some 25% on average across the UK over the past year. And that is something that, as we've been pointing out for some time, clearly can't be sustained for ever. So that's the background against which I turn once again to the question of whether we can continue to maintain reasonably steady growth of output, with high levels of employment and continuing low inflation over the next two years or so. Now there is no denying that we are - as we always are - faced with significant uncertainties and potential risks in the period ahead, even without the possibility of imminent war with Iraq. The global economy may not pick up gradually - as we certainly hope that it will - and some real gloomsters still talk of the possibility of a double dip back into recession. Domestically the gloomsters talk of the risk of a sudden sharp fall in the rate of growth in consumer spending - often related to a "crash" in house prices generally. That's to say not just a sharp moderation in the rate of increase in house prices but a fall in their actual level generally.
I am therefore delighted that we were able to organise this colloquium with such a set of distinguished speakers, all of which have their exceptional professional standing deeply associated with the financial crisis, either as policy-makers, crisis managers, academics or proponents of regulatory initiatives. My introductory remarks this afternoon are organised around the title of this colloquium. My aim is to review policies in the last few years and draw some policy conclusions. I will first touch upon some of the lessons for financial stability, where Lucas’s contribution was especially important, as responsible for the financial stability function, and then turn to the experience with monetary policy. Lessons for financial stability The financial crisis erupted in August 2007, when off-balance sheet vehicles that had been set up by banks to manage portfolios of complex structured credit securities ran into funding liquidity problems. Although initially a liquidity squeeze, concerns about counterparty credit risks quickly spread as uncertainties intensified about the nature and extent of exposures of banks to what we now call “toxic assets”. And, as we know, these escalating tensions culminated in the bankruptcy of Lehman Brothers in September 2008, an event which triggered an unprecedented surge of volatility across mature-economy financial markets and a broad-based decline of asset prices. With this, an adverse feedback between the condition of the financial system and real economic performance was unleashed, contributing to a sharp economic slowdown across the developed economies.