But at the same time, this may be a strength compared with the regulations, simply because it is difficult to “circumvent” an interest rate increase. BIS Review 164/2010  7  Another reason why monetary policy may in some cases be needed as a complement is that there will probably be quite considerable resistance to using regulation to prevent a creditdriven bubble. Banks and other financial market participants may perceive regulation to be a larger intervention than an interest rate increase, and consider it to be aimed only at them. In addition, things often look very good just as a bubble is inflating, so resistance would probably be particularly strong when measures are needed the most. The political and psychological pressure on those pulling on the regulation lever could thus be substantial. Important with a good allocation of responsibility I thereby come to an issue that is just as important as how regulations should be designed; namely, who should pull on the regulation lever and when. Lessons can be learned from monetary policy when it comes to responsibility and mandate. If an authority has a sufficient degree of independence it can more easily withstand external pressure. And if it also has clear and specific objectives, it has greater opportunity to do a good job, while at the same time it is easier for society to evaluate it.
I have already mentioned that there were deficiencies in the regulations and supervision, but these perhaps mainly contributed to the failure to slow down a process that had already begun and was driven by other forces. One factor that some people consider played a role in this is the expansionary monetary policy with very low interest rates conducted by the US central bank, the Federal Reserve, and others during the years before the crisis. 2 Although monetary policy was hardly the main reason for the crisis, it may have contributed to problems building up. A risk-taking channel… Recently, there has been increasing interest in a special channel through which monetary policy may have influenced events – what is known as the “risk-taking channel”. The idea that there is a special risk-taking channel that should be regarded as an independent, previously-ignored part of the transmission mechanism is fairly new. 3 The idea is that low policy rates can in various ways get the banks to take greater risks. When the central bank holds the policy rate low because the outlook for inflation and the economy appears to motivate this, the policy may actually have the undesired and unforeseen effect that risks increase in the banks and in the financial system as a whole. In the long run, this can cause problems. This was what I meant earlier when I said that monetary policy may in some circumstances have unexpected effects.