At the start of the sustained rise in equity prices, stock dividend yields exceeded the yields on Treasury bonds and this was perceived as normal, partly reflecting the searing experience of the Great Depression. Instead, corporate earnings rose relatively steadily, supporting dividend growth. This observation led investors to bid up stock prices and push down dividend yields and this proved – more or less – sustainable. Even today, the yield on the S&P 500 index is below the 10-year Treasury note yield. 6  BIS Review 43/2010  tools available might include limiting loan-to-value ratios, limiting debt service-to-income ratios or increasing the taxes on housing transactions. Several Asian and some European countries have used such tools to limit speculative real estate activity, apparently with some success, although the counterfactual cannot be known by definition. 10 To limit a subprime lending boom, the authorities might wish to enforce strict underwriting practices, including verifying purchasers’ incomes and enforcing rigorous appraisal valuations. Increasing the ability of investors to short the assets in question might also be helpful. In terms of macroprudential tools, I’d also include tools that influence how the financial system operates and functions. Such tools might include supervisory measures that set liquidity and capital requirements for financial institutions and other intermediaries. They might also include tools that try to limit the overall buildup of leverage in the financial system. For the equity market, macroprudential tools might include margin rules for cash, options, futures and equity over-the-counter derivatives.

How has the Pact changed? The fiscal problems encountered by some countries during the downturn triggered a change of the Stability and Growth Pact. In my view, changes were necessary and many of the amendments to the Pact go in the right direction. However, some of them make the framework less predictable. The change consists of three parts: better governance, changes in the preventive arm and changes in the corrective arm. Better governance Better governance includes better budgetary discipline at national level, more realistic forecasting and more reliable statistics. National budgets should be complementary to the member states’ commitments under the Stability and Growth Pact. National institutions could play a more prominent role in budgetary surveillance through increased attention to the development of public finances in public opinion. But apart from those general words, the reformed pact does not spell out any guidelines for appropriate developments of national institutions. Within the EU we have now begun to analyse various forms of national regulations. I hope that the continued work will lead to stronger anchoring of fiscal policy among the member states. I will return to this question a little later. More realistic forecasting consists of having some common assumptions, mainly on external developments, in the stability and convergence programmes. The experiences from the first year of the reformed Pact indicate that it has led to more realistic national growth forecasts. More reliable statistics refer to budget data problems ranging from creative accounting via methodological problems to understaffed and non-independent statistical compilers.