##ance ” – but without being predicated on the fallacious assumption that regulators will always know best. we need policies that steer away from a retreat to the financial repression of the 1940s and 1950s, but that have a more sceptical view of the latest financial innovations, and in particular maintain a much greater degree of distrust of leverage, in all its forms. and we need a system that is more robust in the face of occasional financial failures. this is a challenge, of course, for financial institutions, prudential supervisors and those responsible for seeking to maintain overall system stability alike. indeed, these two perspectives have to be married more effectively than they have been to date. assumptions reasonably made at the level of the individual institution when assessing prudential strength – say, about the availability and liquidity of various markets – may turn out to be collectively invalid. in the case of central banks, surely we cannot avoid another look at the question of monetary policy, asset prices and leverage. this has been a long running debate – going at least as far back as the early 1990s, in my memory. distinguished scholars have disagreed on the extent to which monetary policy should respond to movements in asset prices over and above their estimated impact on inflation via wealth channels, etc. some argue in favour of “ leaning into the wind ” of asset price swings, 1 while others eschew that on various grounds, in favour of dealing with the aftermath of asset price busts if and when they occur. several chapters have been written in the story, the most recently completed one being in the early 2000s after the “ dot. com ” boom and bust. i think it could be said that, at that time, those advocating leaning into the wind did not get enough traction – i suspect mainly because growth in the united states was fairly easily restarted after the shallow recession of 2001 that followed the “ dot. com ” bust. in the aftermath of the excesses of the subsequent period, a new chapter is now being written in this discussion. knowing the next speaker, bill white, as i do, there will probably be food for thought on the topic here today. see sg cecchetti, h genberg, j lipsky and sb wadhwani ( 2000 ), asset prices and central bank policy, geneva reports on the world economy no 2, international center for monetary and banking studies and centre for economic policy research, geneva.

. globalisation has also been important, with much economic and financial activity increasingly organised on a transnational basis. hence, there is much greater interdependence between national financial systems – and one of the remarkable features of the recent global turmoil has been the speed at which problems have spread across borders at critical moments. this is true not only of financial difficulties, by the way, but also of the effects on the real economy. modern management of inventories and shipments has probably transmitted weaker demand back up through the production chain, across countries, all the way to the raw materials sector faster than in the past. ( this should, of course, be stabilising in the sense that it prevents the old fashioned inventory cycle amplifying the effects of the swings in demand. ) the slump in trade has also been exacerbated by dislocation in trade credit, which is but another manifestation of counterparty risk. but something more than just the usual effect of lower us demand via trade channels has been at work. the ubiquity of access to instantaneous “ news ” – from globalised news organisations and via the screens on our desks, cnn and so on – and the pace at which households and businesses adjusted their expectations and behaviour based on this new information was surely a big part of the explanation for the highly synchronised slump in demand around the world during the final few months of 2008. i suspect that economists will debate for years ahead the nature of what has clearly been a common shock to all countries. my reading of the episode is that the extraordinary financial events of september and october 2008 – several large financial failures, large scale rescues of major institutions, enough incipient systemic concerns about banking systems to lead governments to issue guarantees, investor panic on share markets – were all observed in real time by households and businesses right around the world. this caused a collapse of confidence, a disengagement from financial and business activity and a much more cautious attitude to spending. it has had very large effects on the real economies of most countries. recent challenges for the operation of monetary policy how then has all this affected the task of conducting national monetary policies? here i will take some liberties and define monetary policy more broadly than just the setting of the overnight interest rate, and include the full gamut of central bank operations in markets. the first point to note is the international spillovers of the crisis, stemming from the cross border integration i mentioned earlier. the earliest evidence of