In order to stop the credit growth and housing boom, interest rates would probably have had to be raised very high so as to cause considerable damage to the real economy. They could have thrown the U.S. right into Japanese-style deflation and eventually a liquidity trap. Certainly higher interest rates would have had no impact on the regulatory problems, distorted incentives and information problems mentioned above (although they could have ended the Great Moderation with a deep recession and deflation). 10 However, perhaps it is possible that the Fed’s emphasis on its readiness to relax monetary policy aggressively in the wake of a sharp fall in asset prices (Greenspan 2002) may have induced expectations of a floor under future asset prices and contributed to the asset-price boom (the “Greenspan Put”; see Miller, Weller and Zhang, 2002). Arguably, this is more a communication issue rather than one of actual policy, and less emphasis on the readiness to clean up after a sharp fall in asset prices might have been a preferable alternative. 5. Conclusion: does flexible inflation targeting need to be modified in light of the crisis? What conclusions can we draw from the financial crisis so far about the conduct of monetary policy and any need to modify the framework of flexible inflation targeting?
We have to ask whether today’s blanket approach to welfare, higher education and health is promoting a culture of reliance on the State rather than the encouragement of private initiative. Our system does not focus exclusively on those who are truly in need, but also provides a cushion for higher income earners, at the cost, however, of a heavier fiscal burden. 2  Swedish Ministry of Finance and H. M. Treasury Social Bridges: Meeting the Challenges of Globalisation, London and Stockholm, April 2006. BIS Review 113/2006  3  Social programmes must be sustainable The time has, therefore, come for a radical reform that reconciles the objective of social cohesion with financial sustainability. Non-essential transfer payments should be reduced, especially those that are of a universal nature and do not address a proven need. The introduction of means testing must be seriously considered, accompanied by continued efforts to reduce tax evasion. The criteria for the granting of certain benefits should be tightened further. The underlying objective should be to promote a culture of self-help and efficiency. In the field of higher education, for example, since an academic qualification enhances the student’s income-earning potential, I believe a strong case can be made for at least the partial replacement of grants with loans for students from a better-off financial background, with a repayment schedule that provides for moratoria to suit the post-graduation realities of the particular student.