But this time is different, I believe, in four key ways:  -  First, since the financial crisis, financial intermediaries have faced unprecedented pressures to reduce costs to ensure their business models can deliver the sorts of returns expected by investors. 2  Some estimates put the necessary cost reductions as high as 35-40% . Savings of that scale  1  Sunday Times Hiscox Tech Track 100 league table 2017, available at: http://www.fasttrack.co.uk/league-tables/tech-track-100/ McKinsey estimate of cost reduction required for UK and European banks to meet an 8% cost of capital: see http://www.mckinsey.com/industries/financial-services/our-insights/a-brave-new-world-for-global-banking. 2  2  All speeches are available online at www.bankofengland.co.uk/speeches  2  require transformational, not incremental, change – and that inevitably involves technology. -  Second, technology has become much more easily and cheaply available in recent years, reducing entry costs sharply. Until surprisingly recently, standing up competitive financial services technology required access to expensive dedicated systems and communications links – something rarely if ever available to new entrants. Perhaps for that reason, key parts of the financial system have remained based on a patchwork of reliable, but sometimes startlingly old, hardware and software. The development of secure internet communications, service-based applications allowing firms to buy as much (or as little) support as they need, open-source code and other key pieces of infrastructure have changed all that, making it radically cheaper to build potentially transformational technologies whilst only incurring the marginal costs of doing so.

Finally, it is only the speculators that  4  BIS Review 40/2004  are fuelling the rise in prices. While they know that the price increases are exaggerated, they do not know when the situation will turn. The slightest signs of an imminent change lead to large-scale selloffs, and prices plunge. In well-developed markets, participants that judge the price increases to be excessive always have the possibility to make a profit by taking offsetting positions. Uncertainty over when the situation will turn, coupled with reward systems that encourage short-term gains, are likely to result in an insufficient number of investors taking offsetting positions. Financial accelerator effects most likely lead to a situation where rising asset prices, regardless of whether they are being driven by short-term investors, also affect the real economy and thus can contribute to overinvestment. As regards house prices, the risk of a purely speculatively driven rise ought to be lower. This is true especially of economies such as the Swedish one, where regulations make it very difficult to own and let houses and apartments for speculative purposes. Empirical studies also indicate that the risk propensity of investors and lenders appears to increase according as economic activity strengthens, while it decreases markedly during economic declines. So, when economic activity has been improving over a long period, investors appear to interpret this as meaning that growth will continue to rise at the same high rate, without taking account of the risk of a slowdown.