But such lending is well-collateralised, so low risk, and is always intended to be temporary: to overcome a one-off shock or to bridge to a more lasting solution. To discourage reliance on these operations, standard practice is to charge a penalty rate relative to market prices. These liquidity insurance operations are an integral part of the Sterling Monetary Framework which delivers our monetary policy objectives (See Fisher, 2009 for further details). The Bank of England does not have access to funds that could be used to sustain commercial lending operations. We do not have the power to raise tax, nor do we have significant retail deposits, nor the freedom to borrow in large scale in the wholesale markets for non-monetary purposes. 3 More generally, in a capitalist economy, it is private sector or, in some cases, national savings which ultimately fund the banking system. And it is the job of financial intermediaries to translate those savings efficiently into private sector spending. In contrast, the fiscal authorities (including national wealth funds where they exist) can access private sector funding via taxation or by borrowing in large scale. There are many instances throughout UK economic history where the government has intervened to support private markets, or indeed individual firms. There are well-known risks associated with such action, including the loss of public money and/or an inefficient allocation of capital in the economy. There are also substantial and well-known potential benefits if the intervention corrects a market failure or achieves a wider social objective.
Although it can probably be said that the credit expansion and house price trends have not yet had decisive significance in our interest rate decisions, they are factors that must be included in the equation. It is also important for the Riksbank to try to find a suitable balance between stabilising inflation and the real economy and also taking into account the consequences for financial stability. In the same way, fiscal policy must meet the requirements for long-term stability and sustainability in public finances, with the aid of budgetary targets and expenditure ceilings, which does not exclude consideration of the real economy. This allocation of roles has proved successful and we should therefore proceed with caution as regards making any drastic changes. My reply to the question of how roles should be allocated between fiscal policy and monetary policy is therefore; as they are now. The same conclusion has been reached in many other countries as well as in academic research. What is important in this context is that one realises that the Riksbank takes real consideration when formulating its monetary policy, to the extent it deems this to be wise. It is possible, however, that this is something we need to be clearer about. Can and should monetary policy and fiscal policy develop? In my opinion, one can of course say that both monetary policy and fiscal policy are constantly developing.