international banks in the latest financial crisis illustrates how real this problem can be. 5 this is also an example of how risks that may not appear significant from a microprudential perspective may actually become much more worrisome if assessed through a macroprudential approach – a viewpoint whose importance andy was among the first to stress. another channel through which tbtf status can endanger financial stability relates to the balance between idiosyncratic and aggregate risk. regardless of their portfolios, large banks are particularly exposed to sovereign risk and policy uncertainty, two sources of aggregate risk. at the same time, the spread - risk relationship, i. e. the sensitivity of banks ’ funding costs to bank risk, weakens when a bank is thought to have tbtf status. put differently, in relative terms large banks take less idiosyncratic risk, but more aggregate risk. this can make the system inherently riskier, and it is one of the reasons why many regulatory initiatives have tried to tackle the tbtf problem and reduce its externalities. 6 the related issue of the bank - sovereign loop is also dear to andy. 7 andy has been an advocate of the idea that economists should communicate more with, and ideally learn more from, ‘ proper ’ scientists, and that some of the tools employed by biologists and engineers could be deployed in the financial sphere, too. his work on financial networks is motivated by the intuition that financial crises spread pretty much like diseases, through contagion mechanisms that depend on the nature and structure of the linkages between banks. 8, 9 a key message from andy ’ s work is that network complexity can be good or bad for financial stability. the reason for this is that highly interconnected interbank networks exhibit a knife - edge property. in the case of small shocks, the connections across banks ( such as loans and repos ) typically serve as risk sharing and mutual insurance devices, making the system more resilient. beyond a certain threshold, however, they act as amplifiers, generating broad and unpredictable default cascades – an extreme form of systemic risk. once again, the appeal of this story is immediate when thinking about our recent history : increasingly complex financial networks seemed to deliver greater stability for a long while, until lehman – a large shock – came along. the most vivid example of this principle that comes to my mind, however, has nothing to do with finance. on the 28th of september 2003, italy was hit by a massive electricity black - out when

is a subject for debate, 16 yet it set a fundamental precedent, above all because of the firm way in which it was conducted. as a matter of fact, the fed was not the first central bank to make such a move. as early as 1974, the bundesbank had adopted a resolute approach to the fight against inflation, implementing a monetary policy based on controlling the quantity of money and communicating the target in order to steer expectations. 17 the evolution of monetary policy was mirrored by an evolution in academic thinking, for which the two fundamental references were the articles by kydland and prescott and by barro and gordon. 18 the problem was defining optimal monetary policy principles in a pure fiat regime. under certain circumstances, the action of a central bank may be vulnerable to dynamic inconsistency, thus distorting inflation upwards. the literature provides a variety of solutions ranging from strict rules for money supply growth to the introduction of ‘ constitutional ’ constraints to specify the purposes of central bank action and protect its independence. these issues are well - known and need not be discussed here. what matters for our purposes is that money was essentially seen as the determining factor for price development, and not as being auxiliary to macroeconomic stabilisation policy. in this strand of literature, the rate of price increases, for a given level of real growth, is determined in the long term by the money growth rate ( a concept which, incidentally, ethan harris, in the reconstruction of the recent history included in his work on bernanke ’ s federal reserve ( e. harris, ben bernanke ’ s fed : the federal reserve after greenspan, harvard university press, boston, ma, 2008, p. 46 ) mentions a draft law designed to force through an easing of monetary policy, a congressional resolution with the same aim, various calls by members of congress for volcker to resign, and numerous attempts by the public and by representatives of various industries to intimidate the central bank, including the farmers ’ siege of the fed ’ s main building in washington dc in 1979. the federal reserve under volcker remained steady even in this tense atmosphere ; this capacity to stand its ground set a precedent that would later be followed by greenspan during the presidency of bush senior. the peak in the annual growth rate of the consumer price index was 13. 6 per cent in june 1980 ; the index went down to 2. 9 per cent in june 1983. it rose slightly later on and then stood at