past decade is well founded. but what is less often appreciated is that much of that rise in household debt was matched by a comparable increase in the value of financial assets held by households. the value of housing assets purchased by households did increase, through additions and improvements to the housing stock. but the main counterpart to the rise in borrowing was increased saving. to make this point more concretely : while households accumulated an additional £1trillion of debt between 2000 and 2008, they also acquired over £750 billion of financial assets over the same period. 2 what was going on? to caricature things only a little, older households ( or rather those trading down within the housing market ) benefited from selling homes at much higher values. they were the winners. the big losers were younger households ( or those trading up ), paying more for those houses and accumulating higher debts. the money borrowed by young families ended up in the bank accounts of older households. that money wasn ’ t used to fuel a spending boom. rather, it was left on deposit or used to invest in other financial assets. the huge increase in borrowing by one part of the population was broadly matched by a big increase in saving by another part. the increase in house prices over the decade to 2007 – and the massive financial flows associated with that appreciation – represent a huge redistribution of wealth between different households within our society. two important points should be drawn from this episode. first, any analysis of the increase in household debt over the past decade has to pay equal attention to the record accumulation of financial assets. they are two sides of the same coin. second, changes in house prices do not result in significant changes in aggregate household wealth : for every winner gaining from higher house prices is a loser facing less affordable housing. but that does not mean that changes in house prices can not have significant implications for the macroeconomy. house price changes may directly affect aggregate spending both through their effect on the value of housing collateral, and hence on the ability of households ’ to access credit, and through the different propensity of winners and losers to spend their “ windfalls ”. a debt hangover? even though the accumulation of debt was not driven by excessive consumption spending, the sharp falls in asset prices associated with the financial crisis have led to a marked deterioration in households ’ financial position – assets are worth less but the debts still need to be repaid. the market value of households ’ financial and housing assets has fallen by over

the scale of our asset purchase programme to £175 billion. that level of bank rate and scale of asset purchases were maintained at the mpc meeting earlier this month. you may have notice that at our meeting in august there was a split vote amongst the committee. a majority of the committee – including myself – voted to increase the asset purchase programme to £175 billion, whereas a minority preferred a larger expansion to £200 billion. it is important not to make too much of this difference ; all members were of the view that a further degree of monetary stimulus was needed to meet the inflation target. my own judgment was that the uncertainty surrounding both the economic outlook and the effects of asset purchases made it difficult to have a strong view as to the relative merits of increasing the asset purchase programme to £175 billion or £200 billion. indeed, the inflation projection that was published in the august inflation report suggested that either policy was consistent with hitting the inflation target, depending on the future path of interest rates. for me, the decision came down to an assessment of the risks of doing too much versus the risks of doing too little. with regard to the potential risks of doing too little, my main concern was that nominal demand would not recover to a level consistent with hitting the inflation target. my main worry with doing too much stemmed from the uncertainty associated with using asset purchases as a policy instrument. we do not have much experience of conducting monetary policy via asset purchases and there is a risk that their effects will be transmitted through the economy in ways we do not predict and do not want. for example, the substantial injections of liquidity might result in unwarranted increases in some asset prices that could prove costly to rectify. i placed considerable weight on both risks and thought that they were best balanced by an expansion of the programme to £175 billion. i am hopeful that we have started along the road to recovery. the journey is likely to be long and not without difficulty. but the monetary policy committee stands ready to do whatever it takes to ensure that the economy moves into better balance and inflation remains on track to hit the target. references bakhshi, h ( 2000 ), “ the sensitivity of aggregate consumption to human wealth ”, bank of england working paper no. 108. benito, a., waldron, m., young, g. and zampolli, f. ( 2007 ) “ the role of household debt and balance sheets in the monetary transmission mechanism ” bank of england quarterly bulletin