mervyn king : monetary policy developments speech by mr mervyn king, governor of the bank of england, at a dinner hosted by the iod south west and the cbi, bristol, 22 january 2008. * * * it is four months since northern rock came to the bank of england for support. and the headlines continue to be dominated by its fate. northern rock, however, is not the epicentre of the present global banking crisis. that lies in the very substantial losses made by many banks in the main financial centres as a result of the collapse of the us sub - prime mortgage market. those losses, and the fear of future losses on a wider range of loans, pose a threat to the ability of the banking system to finance continued economic growth – the so - called credit crunch. concerns about the implications of a credit crunch, not only for the health of the us but for the world economy, lie behind the sharp falls in global equity markets over the past week. so the next year will pose economic challenges for all of us – more so than at any time since the bank of england was given its independence in 1997. both industrialised and emerging market economies have been affected by the fall in asset prices but conditions vary across countries. it is striking that the banking crisis originated at the heart of the world ’ s major financial centres. and the country most severely affected is the united states where the federal reserve today cut interest rates by 75 basis points – the largest reduction since august 1982 – to mitigate “ increasing downside risks to growth ”. the contraction in the us housing market has deepened and unemployment there is rising. i want tonight to explain the nature of the challenges facing us and why many of them originate outside our shores. exactly five hundred years before the bank of england was given its independence, an italian migrant who had made his home in bristol, giovanni caboto, or john cabot as he was known, set sail from this great city in may 1497 and became the first european to land on the north american mainland since the vikings. a seafaring voyage like cabot ’ s is a good analogy for the challenges facing the british economy, which will have to navigate some distinctly choppy waters in 2008. the challenge to the monetary policy committee ’ s ability to navigate our way through the next year reflects two strong economic winds ; one from the west and one from the east. they correspond to what economists call demand and supply shocks. the former is the credit crunch which

market in which he would sell his products. a feature of the market is that it is driven by the consumer who is considered the sovereign. if the consumer does not need a product, no one could force him to buy it, even when it is supplied free of charge. hence, the goods and services that are produced by micro - businesses should always meet the requirements of the consumers. how can a micro - entrepreneur identify the market requirements? what proxies can he use for that, if he does not have direct information on the same? a problem which he would face in this respect is that he has to produce for the future. hence, any information relating to the past may be a poor guide for that. this is not a problem unique only to micro - businesses. it is equally relevant to big producers as well. but the advantage for such big business firms is that they have the benefit of the results of consumer preference surveys conducted by various institutions. such survey results are expensive and beyond the financial capacity of micro - businesses. yet, without the benefit of such results, it would be a pure gambling for a micro - business to get into the production of these goods and services. in a world where information is costly, this would be a serious blow to the potential micro - entrepreneurs. what this means is that if correct information is not available, micro - businesses are doomed to fail. hence, in the delivery of microfinance, it is equally important to arm the micro - entrepreneurs with accurate market information regarding the consumer preferences. though such information may be costly to a single user, it may not be so if all micro - entrepreneurs get together and acquire the necessary information wholesale. such information could be kept in an information bank maintained at microfinance institutions. since it is not advisable to provide such information free of charge, due to the potential moral hazard problem, a fee should be charged from the users. in addition, microfinance institutions too could conduct such market research and disseminate the required information among their customers. that should also be provided at a price. another important requirement of micro - businesses is the need for preparing micro - business plans. the necessary technical know - how for this is not available with the ordinary micro - entrepreneurs. it requires them to prepare the estimates of cash flows, market sales, funding requirements, legal and marketing aspects and business disaster management techniques etc. once they are put into a generally accepted format, then only they would be acceptable to the