And it was placed in doubt partly because banks in those countries spared a  16  See “Global Liquidity”, M Carney (2011), at the Canada-United Kingdom Chamber of Commerce. 17  Both play a role in, for example, Obstfeld and Rogoff (2009), “Global Imbalances and the Financial Crisis: Products of Common Causes”  18  See “Reforming finance: are we being radical enough” Clare distinguished lecture in Economics and Public Policy, Turner (2011) and Discussion by Tucker (2011). 19  See Cochrane (2011) “Discount rates”, Journal of Finance, Vol. 66, pages 1,047–109. 20  For example, Justiniano et al (2011) decompose the drivers of US macroeconomic fluctuations using two different technology shocks: to the relative price of investment and to the transformation of savings into future capital input. They find that the latter shock is the most important driver of US business cycle fluctuations and is almost identical to the observed spread between high-yield (non-investment grade) and AAA-rated corporate bond yields. This echoes work a generation ago by Ben Friedman and Ken Kuttner (1994), “Indicator Properties of the Paper-Bill spread. Lessons from recent experience.”  6  BIS central bankers’ speeches  property boom had, directly or indirectly, financed property bubbles or over-indebted governments elsewhere around the euro area. In the US, as elsewhere, a supposed business model of “Originate & Distribute” – ie capital market intermediation – morphed into “Originate & Warehouse the large pieces that cannot be distributed, or at least tuck them away in shadow banks we can fund”.
These include the following assumptions:   that a diversified portfolio of US real estate had little risk of falling in value;    that Triple-A rated securities based on mortgages were so well protected by the structure of the securitization that they posed little risk even if real estate prices did fall;    that the evolution of many financial institutions to an “originate to distribute” model of lending and securitization meant there was little risk exposure to declining real estate prices; and,    that there was little risk of a “run” on organizations like investment banks that relied on short-term, collateralized borrowing. 1  Of course, the views I express today are my own, not necessarily those of my colleagues on the Board of Governors or the Federal Open Market Committee (the FOMC). BIS central bankers’ speeches  1  Then to conclude I’d like to briefly mention what we can and must do to reduce the risks resulting from these sorts of financial myths, going forward. I believe that financial stability will, in the future, be better served as we implement some of the protections afforded by the Dodd-Frank Act; but I also suspect that doing better at protecting against various financial myths ultimately requires a cultural change. As a discipline, risk management has been too willing to accept that historical statistical relationships will be stable.