1  For an extensive survey, see Reinhart, C and Rogoff, R, (2009), This time is different: eight centuries of financial folly, Princeton University Press. 2  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  2  Stagflationary threats were tamed by new regimes for monetary stability that were both democratically accountable and highly effective. Clear remits. Parliamentary accountability. Sound governance. Independent, transparent and effective policy-making. These were the great successes of that time and their value endures today. But these innovations did not deliver lasting macroeconomic stability. Far from it. Price stability was no guarantee of financial stability. An initially healthy focus would become a dangerous distraction. Against the serene backdrop of the so-called Great Moderation (Chart 1), a storm was brewing as total non-financial debt in the G7 rose by the size of its GDP (Chart 2). Several factors drove this debt super-cycle including demographics and the stagnation of middle-class real wages (itself the product of technology and globalisation). In the US, households had to borrow to increase consumption. “Let them eat cake” became “let them eat credit”.2 Financial innovation made it easier to do so. And the ready supply of foreign capital made it cheaper.
28  8  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  8  However, as the old fault lines close in advanced economies, they are widening in some emerging market economies. For example, while China’s economic miracle over the past three decades has been extraordinary, its postcrisis performance has increasingly relied on a large build-up of debt and an associated explosion of shadow banking (Chart 5). The non-bank finance sector has increased from around 10% of GDP a decade ago to over 100% now, with developments echoing those in the pre-crisis US such as off-balance sheet vehicles with large maturity mismatches, sharp increases in repo financing, and large contingent liabilities of borrowers and banks. The Chinese authorities recognise that “this time may not be different” and have begun taking measures to manage the risks.30 More broadly, a potentially major new vulnerability has emerged across the G20. This risk starts, as is often the case, with a positive development. Global assets under management have grown from around $ trillion a decade ago to $ trillion in 2017,31 and have accounted for all the increase in foreign lending to EMEs since the crisis. This is bringing welcome diversity to the financial system. At present, however, asset management’s growing importance could increase the risks of sudden stops and feed more intense capital flow reversals from emerging markets.