of supply and demand. this means that they are dependent on the path of economic fundamentals ; in the case of government bonds, for example, the relevant factors include the budget balance, monetary policy and inflation expectations. financial asset prices are highly susceptible both to expectations of how the market ought to move, given the underlying conditions, and to how it will move, given the expectations of how other players will act. this can result in wide fluctuations. prices may deviate for a considerable time from what could be regarded as their long - term equilibrium. markedly inflated prices can result in ‘ bubbles ’, out of touch with the level that seems to be fundamentally justified. examples of this are the developments in some asian countries in the mid 1990s, as well as price movements in the swedish property market around the turn of the 1980s. to some extent, such phenomena can be explained in terms of how economic policy is conducted. but the causes of large price movements are also to be found in the construction of financial markets. if a market is to function properly, all the relevant information should be available simultaneously to every player. in practice, that is evidently not the case. moreover, financial players can act in the knowledge that what they do will influence the market. the fact that performance is assessed in the short run, in many cases in comparisons with other players, makes herd behaviour common. the risk models that are in use are liable to accentuate this phenomenon, even though such models are actually intended to do the opposite, namely minimise risk and instability. a signal from a risk model can trigger sales by numerous investors, whereupon prices fall still further. in this way, a mechanical application of risk models is liable to exacerbate price fluctuations. financial market globalisation also leads, as i mentioned initially, to increased capital flows. low transaction costs and high liquidity enable individual investors to pledge assets in the market to a greater degree. this leads to closer links and more interaction between different markets ; a player may take large positions not just in markets for different assets but also in markets in different locations. price movements may be affected if market players lose confidence in a particular geographical market or incur losses that oblige them to dispose of other assets. globalisation has naturally increased such contagious effects, as we clearly saw last autumn. recurrent financial crises in many ways, global economic development in the past two to three decades has been outstanding. annual growth since 1980 has averaged over 3 per cent. the

argument to its logical limit – to ensure we internalise all possible spillovers let ’ s just have one body determining every aspect of public policy – i think we ’ d all have misgivings with the outcome. apart from anything else the policymaking process would be far too complicated to hold any one bit of it to account and the all - powerful policymaker would naturally tend to focus on the more verifiable tasks. a bit like the man who loses his keys in the park but looks for them under the streetlamp “ because that ’ s where the light is ” the attention of policy would be directed to the most observable objectives. perhaps we collectively fell foul of this trap, in some ways, ahead of the crisis. the risk of a rare event is not an easy thing to judge and, having gone so long without a serious problem in the financial system, our attention was distracted by the more easily monitored task of stabilising the economic cycle. maybe people were too beguiled by the “ great stability ”, if only because data confirming it arrived with such regularity, to notice what was going on within the financial system. all speeches are available online at www. bankofengland. co. uk / speeches one obvious lesson has been that the stability of inflation is no guarantee of financial stability – hence the ( re - ) creation of macro - prudential policymaking. i think another lesson is that it ’ s better to grant these powers to a single, accountable body, “ ring - fenced ” from the other functions of the central bank. i don ’ t want to overstate the case and i ’ m certainly not suggesting any sort of “ chinese wall ” between the two functions. there are clear advantages in having them housed in the same institution. many economic issues are relevant for both and, in the bank of england, the mpc and fpc regularly receive joint briefings on such matters. even if the two hands are separate, it is important that the one should know what the other is doing, and in that respect it helps that some people sit on both committees. and if and when there were a serious co - ordination challenge – if, for example, one body became concerned about its ability to meet its primary objective, without enlisting the assistance of the other – then i think the current system in the uk would allow that to happen. equally, there are also clear advantages in a degree of separation. one – something i