Sir Leslie’s early years at the Commonwealth Bank were spent dealing with the Great Depression, one of the great pathologies of economic history. I joined the Bank of England from academia a little over a decade ago. While my first seven years turned out to be an unusually tranquil period for the economy, the past four years have been anything but. So tonight, I thought I would discuss some of the lessons that I think central banks should draw from the Global Financial Crisis of 2007–8 and the subsequent Great Recession. The distinctive feature of a central bank derives from its role as the monopoly supplier of outside money, comprising notes and coin and commercial banks’ reserve deposits. These constitute the ultimate settlement asset for an economy and mean that a central bank has a unique ability to create or destroy liquidity through the use of its balance sheet. The primary objective is to ensure that the supply of that liquidity is consistent with the smooth functioning of the real economy. From this follows the two core tasks of a central bank: the maintenance of broad stability in the price level, nowadays often enshrined in a formal numerical target for inflation; and supporting the process of financial intermediation during times of stress, including acting as Lender of Last Resort to solvent, though temporarily illiquid, financial institutions. Of course, central banks sometimes carry out other tasks too. The Bank of England, for instance, manages the government’s foreign exchange reserves and used to manage our national debt.
We already acknowledged the benefits from all specific measures implemented during the crisis, but we should be aware of their transitory role and the need to get back to the standard policy tools. Of course, the signs of current recovery are pointing to different stages of the normalization path and therefore, this reversal in the policy settings will differ from country to country. The new threat of deflation in the advanced economies is yet another potential obstacle in this reversal. From this point, that is already a challenging one, the next big challenge will be to return to a solid and sustainable growth. During this crisis, we experienced a lot and we learnt a lot. A number of weaknesses, mainly in the financial and fiscal areas, have been detected and addressed. Anyway, with the first signs of economic recovery, not everything has been fixed yet. There is still a need to repair banks’ balance sheets, to squeeze central banks’ balance sheets, to restore market confidence and to strengthen public debt management. The prolonged period of low interest rates has created a room for fiscal expansion and public debt increase, but the fiscal authorities must be aware that the end of this period is just about to come. The regulatory and institutional reforms undertaken in the last years should contribute to the soundness and stability of the financial systems. What has been done in this field in the last years should be fruitful on a longer horizon.