Although it is not yet possible to know whether the measures will succeed in full, my assessment is that they have been sufficient to counteract the most acute problems. The measures create a basis for restoring confidence among the general public and between participants in the financial markets. If one tries, one can see some signs of normalisation in the form of falling interbank rates and improved liquidity in the form of higher turnover on some markets. But progress is slow. I consider it rather surprising that market functioning has not normalised to a greater degree, despite the extensive and forceful measures taken by central banks and governments. It is possible that the authorities have not succeeded in communicating the fundamental message that all who lend money to a bank will get their money back. A remaining problem is that, as a result of the crisis, the market is requiring that the banks reduce their risks in relation to equity capital. The banks are therefore selling financial assets, which squeezes the price in the entire world market. This is why the banks want to reduce their balance sheets by cutting back on lending. The process will continue until the banks have reduced their balance sheets sufficiently or acquired new risk capital. The Riksbank will contribute liquidity as long as is necessary The Swedish interbank market functioned satisfactorily up to mid-September, although the cost of the banks’ international borrowing rose, of course.
The 1946 Bank of England Act conferred upon us powers, subject to the agreement of the Chancellor of the Exchequer, to issue directions to bankers - though the term “bankers” was not defined; and it provided for the Treasury to give such directions to the Bank as, after consultation with the Governor, they thought necessary in the public interest. Such directions would necessarily have been made public: none were in fact ever given. In any event the Bank of England was in a formal, statutory, sense throughout this period well along the spectrum towards the subservient polar extreme which I described earlier, in relation to policy making, although we did enjoy elements of independence, for example, in relation to security of tenure for the duration of fixed term appointments for Governors and Directors, and in some degree in relation to our finances. I am bound to say though that this was not at all how it felt in practice. Even within this statutory framework independence is rather like age - you are as independent as you feel! The question really came down to how far we were able to influence the Government, which in turn depended upon how far they themselves valued our advice and how far they felt a need to take account of it in the light of possible public - including importantly financial market - reactions in the event of disagreement.