financial system more generally in many economies ; second, through stimulatory fiscal policies ; and third, through supportive monetary policies – very low interest rates and direct injections of money to support demand in a low interest rate climate, such as the mpc ’ s policy of “ quantitative easing ”. however, the current level of stimulus from monetary and fiscal policy was designed to turn around economies in the wake of the traumas we experienced 12 – 18 months ago. as confidence builds and private spending recovers, it is likely to be appropriate to gradually withdraw at least some of this policy support for demand, without jeopardising growth prospects. the need to re - adjust economic policy is most obvious on the fiscal side, where deficits are very high by historical standards, particularly in the us, europe and japan – as chart 7 shows. these large deficits reflect the important role that public spending and tax policies have played worldwide in stabilising economic conditions during the recession. but to ensure sustainable public finances over the medium - term, these budget gaps will need to be closed over the recovery. in many countries, policy - makers are rightly concerned about the negative consequences for demand of tightening fiscal policy too quickly and abruptly while the recovery is still fragile. but a tightening of fiscal policy which is pursued as part of a longer - term, credible and well worked - out plan is much less likely to have such negative demand - side effects, and may have offsetting benefits for the supply - side performance of the economy. progress in putting public finances on a sounder footing can increase confidence and reduce uncertainty about future economic prospects, providing a much better climate for a recovery in private sector demand. it can also support the supply - side performance of the economy by helping firms and individuals plan for the longer term. the effects of deficit reduction on financial markets should also be positive for private sector demand. long - term interest rates are likely to be lower in a world in which government deficits are being reined in, and the risk of destabilising financial market movements is also reduced. again, this is likely to provide a much better climate for private sector investment and long - term spending and planning more generally. an additional mechanism through which the negative demand - side consequences of fiscal tightening can be offset is by maintaining a relatively loose or relaxed monetary policy. so the other arm of withdrawing policy stimulus – a tightening of monetary policy – needs to take into account the potential impact of deficit reductions on demand,

in the overnight money market. this need for adjustment also explains why at the bank we are sticking firmly to the plan to allow the special liquidity scheme to run - off on time a year from now. over the last twelve months, banks have taken the necessary steps to move towards that goal. it is all about getting the banking system into a position where it can demonstrate robust capital and liquidity buffers, and to do so by facing up to the discipline of the market rather than the support of the authorities. the edinburgh fund managers are an important part of that market discipline. in a market economy, you are in the front line of defence and discipline. now, i cannot say that the uk is insulated from the risks we observe in other parts of europe. as our most recent financial stability report, published just before christmas, made clear, “ the united kingdom is only partially insulated given the interconnectedness of european financial systems and the importance of their stability to global capital markets ”. as the report also made clear, there are other, probably more medium - term risks posed by evidence of low bond yields in many advanced countries and signs of an intensifying search for yield as capital flows into alternative assets, including into emerging markets. against this backdrop of risks, it is in the collective interest of banks to continue to build up progressively their capital and liquidity resilience so that they support not only themselves, but also the stability of the financial system as a whole. the basel iii agreement, and the reform programme of the g20 and the financial stability board set up under the g20, will provide the supporting framework by which the authorities will back up the discipline of the market to achieve and maintain financial stability. this brings me back to the reforms in the uk. at their heart lies the objective of putting the stability of the financial system at the centre of the regulatory mission. you may say, “ surely that ’ s not new ”. i would disagree – our overriding objective must be to create a consensus of public opinion which will enable financial stability to be embedded as a public policy objective in the same way that in the wake of the 1970s, low inflation came to be adopted as a necessary condition for stable economic growth. too often, i hear people say that achieving financial stability needs somehow to reflect a balance with other objectives, such as competition, consumer protection, and the like. i ’ m sorry, but while these objectives are of course very important, the best way