##anke rightly emphasised last week, one of the causes of the crisis was the impact of the growing current account imbalances on financial intermediation in the main deficit countries, the us and the uk. the large and persistent inflows of capital lowered market interest rates to extremely low levels and encouraged the “ search for yield ”. in response, the financial services industry rediscovered the time - honoured way of raising rates of return – increasing leverage and taking more risk while finding ways of making the degree of risk less transparent. the crisis resulted from the interaction between the “ micro ” behaviour of banks and other institutions in creating new financial assets and the “ macro ” economic strategies pursued by the world ’ s major countries. if we are to make crises less likely in future we will need to concentrate on policies covering these interactions. the size to which the current account imbalances were allowed to grow reflected the fact that the international monetary system, such as it is, placed no pressures on surplus countries and that the main debtor country issued the world ’ s reserve currency. year after year international meetings expressed surprise, and indeed concern, that the imbalances continued to accumulate, but in the absence of a correction the theme became a worn groove in discussions and interest waned. the more forcefully the warnings were expressed, the more they were ignored, precisely because each country appeared able on its own to achieve price stability and steady growth despite the continued build - up of the imbalances. the consequences of this are now evident : a severe global downturn affecting virtually every country in the world. in a world of imbalances it is just as dangerous to rely too heavily on foreign demand for goods and services as it is to rely excessively on foreign borrowing. surely now no country can be indifferent to the objective of improving the consistency of our macroeconomic strategies. so i hope that the debate about the need for symmetric obligations on surplus and debtor countries alike will move on from previous unsuccessful dialogues stretching back to the bretton woods conference in 1944. turning to the “ micro ” cause of the crisis, a root cause was a degree of over optimism in financial markets. history, whether the run up to the 1929 stock market crash or more recently in the dotcom mania, suggests that only very substantial rises in short - term interest rates will bring to an end the excessive speculation, and that such rises bring about the very recession which the policy is designed to avert. what is needed is an additional

of a market economy – long - run increases in our standard of living which other systems have failed to deliver. after another twenty years or so, memories of the panic of 2008 will have faded, and the regulations put in place in its wake will no doubt be seen as old - fashioned, inhibiting of the potential of the city, and as ripe to be swept away as was the glass - steagall separation of commercial and investment banking in the united states a few years ago. a lesson of history is that few generations have been able to avoid a repetition of earlier banking crises. the essential problem is that we can no more bind our successors than our predecessors were able to bind us. rare events, even when dramatic at the time, lose their power to shape policy as memory recedes. the role of institutions is to retain a collective memory and to resist the temptations of the present. that is one of the most important roles of a central bank. it is accepted as such in the domain of monetary policy. and there is an equivalent role in financial stability. the introduction of simple and robust policy tools into a regulatory regime based on the exercise of constrained discretion would make it easier to resist overly rapid expansion of financial institutions. in particular, the authorities should maintain a clear focus on the issues that matter when the worst occurs – liquidity and leverage. it should be intrusive, in the sense of knowing what is going on, but not bureaucratic. a system in which it is easier for a large bank to expand and then destroy its balance sheet than for an individual to open a bank account has lost focus. that is not the fault of regulators, but a reflection of the pressures and incentives they have faced – from all of us. as a kennedy scholar at harvard, i have always treasured harold macmillan ’ s words in his tribute to john f kennedy. he was, said macmillan, a man “ whose eyes were on the horizon but whose feet were on the ground ". in re - designing the regulatory framework we certainly need to keep our feet on the ground, and we should also keep our eyes on the horizon, both ahead of and behind us. more urgent, however, is the immediate task of generating an economic recovery. most of us come from the generation that grew up believing that mass unemployment and world recession were things of the past, relevant to the history books but not the textbooks. that assumption is under threat. we must rise to the challenge.