and an array of distorted incentives led the financial system to build up excessive leverage, increasing the vulnerabilities when asset prices began to fall. as in agatha christie's murder on the orient express, everyone had a hand in it. second, the economics profession has oversold the virtues of unfettered financial markets. we usually start from a presumption that markets work best when they are left to themselves, unless there are obvious market failures present. by the same token, even though not strictly the case in theory, we usually start from a presumption that expanding the range of available securities is beneficial. yet that has resulted in a deeply unsatisfactory outcome. one view is that we need to bring psychology and the insights of behavioural economics into the study of financial markets ( e. g. akerlof and shiller, 2009 ). that may indeed be part of producing a richer and more accurate description of financial market behaviour, particularly in regard to expectations formation. but, as i hope my lecture this evening has made clear, distorted incentives, information failings, collective action problems and network effects have played a large part in recent events. our standard analytic toolkit should get us a long way in understanding what has happened. and that is one step on the road to avoiding a repeat. third, we need to pay more heed to the lessons of history. financial booms and busts have occurred with some regularity ever since the tulip mania of 1636 - 7. yet we tend to treat them as pathologies that happen at other times or in other places. their frequency suggests that we would be better advised to think of them as a central feature of capitalist economies that our models should aspire to explain. fourth, we need to put credit back into macroeconomics in a meaningful way. financial intermediaries are conspicuous by their absence in the workhorse new keynesian / new classical dsge model. the focus is on intrinsic dynamics resulting from inter - temporal decision - making in the face of a variety of adjustment costs and impediments to price adjustment ; there are no financial frictions to speak of. that such a framework has developed is unsurprising in the light of the great inflation and its subsequent great moderation. but the fact that financial intermediation plays a negligible role in mike woodford's magisterial stateof - the - art opus, interest and prices, speaks volumes. some authors have

paul fisher : the economic outlook – some remarks on monetary policy speech by mr paul fisher, executive director for markets of the bank of england, to the agency for scotland, london, 23 may 2011. * * * i would like to thank ronnie driver for his help in preparing this speech. for most of us, the current outlook for the uk economy is not a very attractive prospect. after experiencing a precipitous fall in demand during 2008 / 09, the latest estimates suggest that uk output in 2011 q1 remained around 4 % below its peak pre - crisis level. the monetary policy committee ’ s ( mpc ) central projection published in its may inflation report, is for output to grow at around its historical trend rate ( chart 1 ), such that it would be mid - 2012 before that previous peak level is regained ( chart 2 ). at the same time annual cpi inflation, far from being subdued by the recession, has picked up to 4½ %. in the short - term it is likely to go higher still before, we expect, falling back towards the 2 % target ( chart 3 ). all this poses a significant challenge for policy makers, not least because of the genuine hardships slow growth and high inflation cause for businesses and households up and down the country. chart 1 chart 2 gdp projection based on market interest rate expectations and £200 billion asset purchases projection of the level of gdp based on market interest rate expectations and £200 billion asset purchases bis central bankers ’ speeches chart 3 cpi inflation projection based on market interest rate expectations and £200 billion asset purchases the recent data has not been particularly encouraging. official figures for 2010 q4 and 2011 q1 suggest that there was no underlying growth ( allowing for the unusual impact of snow in december ). and the unemployment rate remains at just under 8 %. the data may not be totally reliable – they never are – but the message we get from our business contacts in all parts of the united kingdom is not inconsistent with this broad picture painted by the official statistics. meanwhile, cpi inflation is likely to go yet higher if ( as the mpc expects ) rises in the price of energy get reflected in utility bills in due course. the largely unanticipated path of cpi inflation over the past couple of years can be explained by three factors : changes in the standard rate of vat, unforeseen changes in wholesale oil and gas prices and higher - than - expected import prices following the 25 % depreciation of sterling since