, can unravel in ways that reduce asset values and increase volatility, and are often sustained by accumulating indebtedness. in the face of ultimately unsustainable macroeconomic imbalances, whether domestically or internationally, the financial system therefore needs to be more resilient than otherwise. that was badly neglected around the western world in the years running up to the current crisis. ( and it remains a risk going forward. ) resilience sounds, and is, highly desirable. but it is not a free good. there are trade - offs. and here lies an important contrast with monetary policy. no one seriously believes that there is a trade off in the long run between, on the one hand, inflation and, on the other hand, growth and employment. while a monetary authority can pump up nominal demand to enhance output and employment in the short run, in the long term the impulse is dissipated in a higher price level, with the economy ’ s real equilibrium determined by real factors alone. but in the financial stability arena, there is a long - run trade off. an economy with a repressed financial system is unlikely to experience financial instability, but it would have plenty of other problems. in consequence, the authorities have to set standards of resilience suited to tail events without impairing the wider functioning of the economy. but we also need to be equipped to raise the required standard of resilience in the light of changing circumstances, notably if we judge the world to have become more threatening than previously foreseen. that is the basis for macroprudential policymakers, such as the uk ’ s fpc, being able to deploy “ cyclical ” instruments, as i shall describe later. bis central bankers ’ speeches firms, markets and infrastructure the resilience of the system depends on that of its component parts and on how they are connected. in the real world, that means firms, markets and infrastructure. it means looking for and addressing vulnerabilities or faultlines in all three. and it entails choices, trade offs, about how far to make individual firms robust and how far to strengthen the system by reducing spillovers from a distressed firm to other firms and markets. amongst firms, plainly banks are a priority. as monetary institutions, they are special. their deposit - liabilities are money. and that enables them to provide committed, on - demand lines of credit, ie liquidity, to households and firms in the

the uk of two key developments. first, the continuing financial crisis in advanced financial markets which has been triggered by the slump in the us housing market ; and second, the renewed build up in global inflationary pressures, associated with soaring energy and food prices. these developments are symptomatic of profound changes in the global economy, as world growth has increasingly been powered by resource hungry emerging markets, and as financial markets in developed countries have taken off and, in the process, become more tightly linked to one another. i will talk about both developments, before coming back to discuss the outlook for inflation and growth in the uk, and the implications for policy. financial crisis the crisis in financial markets last august was triggered by a slump in the us housing market. this, of course, is acting as a direct drag on us activity. any slowing in the us economy stands to affect the uk in the traditional way, through influencing trade flows. the size of this effect will depend on how other trading partners are affected and how policymakers react. but the really striking feature of recent experience has been how the us housing crisis has reverberated through the highly integrated and sophisticated financial markets of north america and western europe. six months after global securitisation markets seized up, in response to uncertainties about the scale and location of losses arising from rising defaults on us sub prime mortgages, some credit markets are still not trading at all, and others remain very illiquid. and each week seems to highlight some new dimension of the ensuing disruption to core financial markets. the crucial task of valuing and disclosing the impact of losses on core banking institutions is still work in progress : important announcements are being made almost daily, and beyond them lies the equally important task of repairing banks ’ balance sheets. the current shortage of liquidity makes the pricing of complex assets even more difficult. at the very least, this reinforces the need for transparency in providing estimates of losses, and descriptions of the best - efforts processes used to produce these estimates. the process of price discovery for many complex asset classes is unlikely to be completed quickly. for assets directly related to us sub - prime, this is unlikely to be before the us housing market stabilises. other structured credit markets are likely to remain illiquid until confidence in the banking sector has been restored, and large financial institutions are willing to take more risk. clearly the situation is still developing. and its impact on the wider economic outlook – global and