citizens in service, not people in power speech given by alex brazier, executive director for financial stability strategy and risk, bank of england member of the financial policy committee at allen & overy, london friday 17 may 2019 i am grateful to hugh burns, james howat, kiman bassi, jonathan bridges, emma moriarty, emily clayton, james hurley, guy debelle, ben broadbent, martin taylor, alina barnett, dimitri demekas and paul tucker for helpful discussions. the phrase ‘ citizens in service ’ is also used by tucker in his book ‘ unelected power ’ ( 2018, page 546 ). all views, errors and omissions are my own. all speeches are available online at www. bankofengland. co. uk / speeches i ’ d like to express my thanks to allen & overy for hosting this event and for bringing together such a formidable crowd to discuss these issues. more than a decade on from the financial crisis, memories can begin to fade. they must not. because the crisis was a disaster : leaving a legacy economic cost equivalent to about £20, 000 per person. 1 like all disasters, it should be memorialised so that future generations are not destined to repeat the past. it ’ s sometimes argued that the crisis happened because nobody spotted that the system was heading for the rocks. i think the causes run deeper than that. they centre on a collective failure to take the long view. the financial system lived for the moment. those that reaped profits and bonus today but would be bailed out tomorrow had every incentive to live for the moment and figure out the rest later. that may not have mattered so much if regulation of that system had taken the long view and had prepared it for bad times, whenever they came and whatever caused them. but it didn ’ t. the report into the failure of the royal bank of scotland, describes a pre - crisis regulator – the financial services authority – responding to political demands from all sides of the debate for ‘ light touch ’ regulation2. the result was a financial system that lived for the moment. it relied on the economic good times continuing to roll. and so, like a city built with no building standards on a fault line, it crumpled dangerously with the first economic tremors. it wasn ’ t the failure to spot the particular coming earthquake that was the real problem. it was the failure to think about the long term. a failure to acknowledge that a quake

could happen at some point and set standards accordingly. based on the net present value of the difference between the path of income since 2007 and a simple extrapolation of its pre - 2007 path. see financial services authority board report on “ the failure of the royal bank of scotland ”, page 10. all speeches are available online at www. bankofengland. co. uk / speeches a failure to think about failure. and so, when the downturn came along, it was turned into disaster as the financial system collapsed. a taxpayer bailout and a million more people unemployed up and down the country. financial instability is something for which everyone, and especially the most vulnerable, pays the price. an independent committee to take the long view against that backdrop, few would disagree with an intention to build a stable, resilient, financial system. but the road to disaster is paved with good intentions. there will always be pressure to live for the moment. a little loosening of standards can bring many years of small gains before the big price is paid. so in the aftermath of the crisis, parliament did not just declare its intention to build a stable financial system. it chose also to commit to sticking to that intention. and there was, of course, a model for how to commit not to live for the moment in economic policy. in 1997, the monetary policy committee of the bank of england was established to deliver the clear intent of sustained low inflation. successive governments had lived for the moment by pushing the economy to expand beyond its potential. each time, that worked in the short term. but ultimately it brought no benefit and only a price : inflation and recession to get inflation back down again. recognising that the pressure to live for the moment had resulted in serious costs, government and parliament sought to entrench the long view in economic management. the results have been impressive. in the 20 years since the monetary policy committee was created, inflation has averaged pretty much exactly 2 %. in the preceding 25 years, it averaged 8 %. in financial stability, the benefit of committing to take the long view can be even greater than in monetary policy. in monetary policy, the upside of living for the moment is enjoyed only for as long as inflation remains a surprise. and inflation is not something easily hidden. all speeches are available online at www. bankofengland. co. uk / speeches in financial stability, the benefits of being underinsured can be enjoyed for a long time