Trade in various assets entails large economic gains, among other reasons because consumption in different countries can be evened out over time. Other advantages are the transfer of technology that often accompanies foreign investments and the increased competitiveness in the domestic market that results when foreign companies are allowed to invest locally. A better complement to monetary policy is thus formed by measures restricting supply and demand for credit, which is to say primarily macroprudential policy measures. Measures for reducing the risks are needed now Having low interest rates for a long time entails risks for the financial system. Low real interest rates are contributing to the growing trends of rising housing prices and increasing household debt. Investors with predetermined nominal required rates of return, such as fund managers, insurance companies and pension funds, are finding it more difficult to reach their targets. This risks leading to an excessive increase in risk-taking, the overvaluation of assets and the accumulation of financial imbalances. In several of the countries worst impacted by the global financial crisis of 2008– 2009, the crisis had been preceded by rapidly-rising debts and housing prices. The downturn after a crisis also risks being deeper and more prolonged if indebtedness has risen rapidly before the crisis. The risks of household indebtedness therefore need to be managed and the longer this is put off, the more expensive it risks becoming. Measures thus need to be applied now to reduce the risks in the financial system. Household demand for loans needs to be dampened.
But, for today’s purposes, I shall take as my starting point a speech given by the previous Governor to the RICS in Paris in October 1989. You will recall that everything in the garden then seemed rosy. Cranes were everywhere on the horizon; there was an expectation that rents and capital values could only move upwards. Banks were developing innovative financing techniques and competing fiercely with one another to finance all this activity. Income returns were not out of the ordinary but the market was underpinned by the prospect of capital gain. 4 Yet some participants and commentators were beginning to have concerns about the scale of development. The Governor questioned whether there would be sufficient demand for the supply coming on stream. He noted too the banks’ rapidly growing exposure to the sector. The sector was quite simply heading for overcapacity and overgearing. Why did the lenders not see it coming? Perhaps inability or unwillingness to see the big picture was one reason - but more of that later. We have been asked quite often why we as the supervisor of banks did not stop them overlending. The answer remains the same. The banks have to be responsible for their own commercial decisions. We are there to protect their depositors, not their shareholders. But we can usefully draw their attention to gathering clouds - and that is what we did. 5 As we all know, the required level of demand did not materialise.