andrew g haldane : small lessons from a big crisis remarks by mr andrew g haldane, executive director, financial stability, bank of england, at the federal reserve bank of chicago 45th annual conference “ reforming financial regulation ”, chicago, 8 may 2009. i would like to thank andrew mason, adrian chiu, david gregory and nick vause for comments and contributions. * * * macro - prudential policy is a new ideology and a big idea. that befits what is, without question, a big crisis. there are a great many unanswered questions before this ideology can be put into practice. these questions will shape the intellectual and public policy debate over the next several decades, just as the great depression shaped the macroeconomic policy debate from the 1940s to the early 1970s. but there are already some smaller lessons to be drawn from crisis events. that is the purpose of these comments. seven issues arising from the crisis are discussed and their implications for policymakers and practitioners assessed. if there is a unifying theme, it is informational failure. this has been a crisis borne of, and prolonged by, lack of information. that fog of uncertainty remains dense 18 months on. because financial markets are, first and foremost, a market in information, these informational failures have generated prolonged paralysis in financial markets. tackling them is priority number one. lesson 1 : finance is no golden goose imagine having placed a hedged bet back in 1900. a £100 long bet is placed on uk financial sector equities together with a £100 short bet on general uk equities. in effect, this is a gamble on the uk financial sector outperforming the market. how would that bet have performed over the intervening 110 or so years? chart 1 provides the answer. for around the first 85 years, this gamble looks like a rather staid strategy. by 1985, it would have delivered a capital sum of £500, at a modest annual average return of around 2 % per year. there were periods of both over - performance ( 19001944 ) and under - performance ( 1971 - 1986 ) by the financial sector over this period. but, give or take, this was close to a break - even strategy. the following twenty year period, from 1986 to 2006, transformed that picture. by the end of 2006, the once - staid strategy would have delivered a capital sum of over £10, 000, at an annual average return of over 16 %. banking

of domestic factors, allowing for a broader international diffusion of major economies ’ disinflationary trends. 1 the shift towards lower trend, or equilibrium, interest rates continued in the wake of the global financial crisis, although it could not be solely attributed to better control of inflation and inflation expectations. in fact, in several advanced economies, central banks for the first time struggled to raise average inflation towards targeted levels, and undershooting became the norm. in this context, the use of unconventional policy tools to circumvent the effective lower bound did succeed in lowering longer - term interest rates, flattening yield curves and compressing risk premiums ; yet it failed to lift most countries out of their low - growth, below - target inflation paradigm. several explanations have been sought for what economists increasingly referred to as ‘ secular stagnation ’, including demographic trends ; a growing propensity to save, exacerbated by rising income inequalities ; a structural break in investmentto - gross domestic product ( gdp ) ratios in dynamic asian economies ; widening productivity gaps between ‘ high - tech ’ firms and others ; and a growing investor preference for safe assets. 2 what seems likely is that most of these factors contributed to structurally lower interest rates, not just in advanced economies but also in the emerging world – even though many emerging markets and developing countries are still far from the ‘ technological frontier ’ and could be expected to grow faster. see for instance ‘ understanding global inflation synchronization ’, in inflation in emerging and developing economies : evolution, drivers and policies, the world bank, 2019, pp 93−141. these topics are discussed, among others, in l rachel and t d smith, ‘ secular drivers of the global interest rate ’, bank of england working paper no. 571, december 2015. south africa was no exception to these trends : in the past decade, our policy rate averaged 6. 1 %, down from 15. 4 % in the 1990s and 9. 9 % in the 2000s. on the positive side, greater compliance with the 3−6 % inflation target range3 and lower inflation volatility have allowed for lower average policy rates and lower volatility of the monetary policy cycle. on a less favourable angle, the trend in real gdp growth lost momentum throughout the past decade, a pattern which is only partly attributable to global trends but mainly reflects domestic supply constraints such as limits to the availability of electricity or critical skills. 3.