which is far richer in its frequency and scope than anything previously. for the first time ever, many of the raw ingredients will exist to map price and quantity dynamics within, and across, markets in close to real time. perrow ( 1999 ), harford ( 2011 ). in the united states, the office of financial research, created under the dodd frank act, is charged with collecting and analysing data submitted by us firms. bis central bankers ’ speeches to date, relatively little thought has been given to how best to put these data to work. they will certainly be useful as an archaeological site, allowing a detailed forensic sifting of the genealogy of historical market events. as with the flash crash, this may enable regulatory detectives to solve the whodunit : who did what when and, perhaps, why. it will allow dna sampling of the victim. an altogether bigger prize would be to put these data to work before the fact, identifying the next victim pre - autopsy. that could mean using transactions data to help detect early warnings of systemic fault - lines and stresses. this is a potentially massive analytical and technical challenge. the technical challenge is certainly surmountable. advances in computer power over the past decade mean that storing and processing huge volumes of data poses no technological barrier. the answer lies in the clouds – conveniently enough, since they too exhibit fractal properties. if we can search and track the world wide web in close to real time, we can certainly do the same for its financial sub - component. the analytical challenge is altogether greater. in essence, it is to find summary measures of billions of transactions data which are informative about impending market stress. there is serious needle - in - haystack risk with such an endeavour. and experience in economics and finance of finding robust early warning indicators is mixed. but here again, the market microstructure literature offers some tantalising clues. for example, easley et al ( 2011b ) have suggested that measures of “ order imbalance ” may provide early warning signs of liquidity voids and price dislocations. their measure of imbalance follows closely in mandelbrot ’ s footprints. it uses a volume - based metric of the proportion or orders from informed traders. any imbalance towards informed traders causes potential liquidity problems down the line as a result of adverse selection risk. easley et al show that their imbalance measure rose sharply ahead of the flash crash, contributing to an eventual eva

to be weighed against the ( as yet uncertain ) costs of the subsequent crisis. secondly, and more significantly, it is not clear that this policy would have tackled effectively the major problem of banks ’ misjudgement of risks and expansion of financial sector balance sheets. at the margin, it might have led to a little more caution among financial institutions, but unless policymakers had been prepared to shock the economy into a period of slow growth it seems unlikely that the financial crisis would have been wholly averted. however, modestly higher bank rate might have had the merit of discouraging households and firms from increasing their own debt levels, and therefore left the economy somewhat more resilient in the face of the crisis. thirdly, action only in the uk might have had limited effect on what has proved to be an internationally widespread crisis whose roots lie to a significant extent in the excess of savings in asian countries and consequent excess of capital inflows into the us and europe. the conventional answer to the question about the pre - crisis period therefore has become that policymakers did not have the right tools available. in the uk there was no provision for macroprudential instruments to be used to deal directly with the problems building up within financial institutions, and to a lesser extent in the indebtedness of households and firms. a more targeted approach to these issues seems highly preferable to using the blunt instrument of bank rate. but despite these cautions, it is possible that it would have been preferable to have taken a more long - term view of the risks to inflation from economic instability. certainly i seriously underestimated the scale of the downside risks from a potential financial crisis, and that implied overrating the ability of monetary policy to offset this shock. i will return later to the question of how a more long - term perspective might sometimes alter the desirable approach to policy. before that, i want to discuss some issues around the mpc ’ s inflation projections and how we assess uncertainty. the balance of demand and supply the mpc ’ s projections for inflation, absent external shocks, are determined to a significant extent by our judgements about inflation expectations and about the likely developments in the pressure of demand on supply ( this phrase is a better description than the more usual “ output gap ” – however i will now use the latter as a convenient shorthand ). during my stint large ( 2005 ). gieve ( 2009 ). on the mpc, the way in which