On the other hand, it is reasonable for public policy regimes to address the externalities – in this case, the potential systemic effects – of thousands of large private transactions that take place away from public markets. My concern is not that sophisticated investors cannot fend for themselves. And I do not want to deny that private transactions can aid stability, as indeed has been the case with much recent private-market debt issuance by banks. But nobody can assess the risks they are incurring in some transactions without much more information about the totality of risks out there and the network of exposures within the financial system. At the least, good aggregate information is needed about patterns of issuance in private markets.12 Product gatekeepers: securities regulators These questions of how securities regulators should respond to the possible effects of innovations on the stability of the system are not limited to their listing-authority function. The rules for collective-investment schemes matter too. A good example, highlighted recently by the G20 Financial Stability Board, is the development of the Exchange-Traded Fund markets to include synthetic structures, leveraged funds, less liquid underlyings, and all three combined.13 Remind you of how securitisations ended up in CDO² and CPDOs? In the EU, ETFs are subject to the UCITs rules for what are in effect mutual funds available to retail investors. Securities regulators need to think about how to avoid mechanically applying a regime for vanilla investment schemes to the structuring and distribution of much more complex and sophisticated products.

Risk aversion is all very well for a time, but it doesn’t pay the rent! What we are now having to cope with are the economic consequences of the earlier financial disturbances. The inevitable counterpart of recession in much of the rest of the world is a sharp slowdown of net external demand – particularly for manufactures – in the industrial world. That has been reflected in growing weakness and falling business confidence in large parts of the manufacturing sector in both the United States and Europe. The prospective growth in world economic activity has already roughly halved – from its trend rate of about 4%. Unless this fall in net external demand is offset by sustained domestic demand growth in the industrial countries – unless, in other words, the industrial economies collectively accommodate the necessary improvement in the external current account position of the emerging countries, through a deterioration in their own current account positions – the prospects for world economic activity would be dismal. Happily, we start from a position of relatively low inflation throughout the industrial world and, faced with weakening external demand, we can afford to see higher offsetting domestic demand growth without jeopardising price stability. Indeed we need to see higher domestic demand growth than we otherwise would if overall demand is not to fall short of underlying supply capacity, and we need it, too, to offset the effects of weak world prices and of lower exchange rates in many emerging market producers on our own domestic price level.