future, so it is not surprising that there should be differences of view. and the opportunity to explore and explain these differences in a rational and open way is an important part of getting to a better answer. the outlook for the economy let me turn now to an assessment of the economy. the recent debate has, of course, been dominated by discussion of the implications of the terrorist attack on the united states, and the political and military response. the loss of life was grievous. few of us will forget the sights we saw on our tv sets that day. and for those most closely involved the feelings must still be of the utmost intensity. standing back, from an economic perspective i would say that the most serious impact has been on sentiment, particularly in the united states. consumer confidence there has fallen quite sharply. equity prices dipped in the immediate aftermath of the attack, the sterling price of oil has fallen by some 18 % since the start of september, and credit spreads have risen. of course, equities have since rallied strongly, with the ftse100 for example now back above its pre - september 11th levels. but substantial uncertainties remain. at the very least, firms and households are likely to delay major expenditure decisions until things become clearer. and this may act as a drag on the recovery in activity. the rise in the cost of security and insurance will also probably have a more long - lasting effect on activity. discussion of the attacks has somewhat obscured the fact that the world economy seemed to be slowing more rapidly than expected even before 11 september. overall activity in the us had been weak, despite continued strength in some sectors, notably retail. and the euro area grew by just 0. 1 % in the second quarter, as net trade slowed sharply. the monetary policy reaction has of course been rapid. in the united states, in particular, interest rates have already been reduced by four percentage points since the start of the year. and fiscal policy has been expanded. these actions should clearly stimulate demand. but, as is always the case, the size and timing of these effects is extremely hard to judge. so far this year, the uk economy has fared rather better than its main trading partners. gdp growth has slowed from the peaks it reached during 2000. but the economy still grew by 0. 6 % in the first quarter of this year, and 0. 4 % in the second. much of that strength, of course, reflects domestic demand growth, and particularly household consumption,

attributed to sir francis baring, who in 1797 referred to the bank of england as “ the dernier resort ”, able to provide funds to an entity when all other sources had been closed off. 6 early writings on i should be clear here that i am not talking about the narrow role where central banks routinely provide funds to an institution that has had some operational snag and found itself short of funds at the end of the day. such standing facilities operate routinely in most countries. we are really interested here in the much more taxing situation where the standing facility is not adequate. this is where the lender of last resort really has an important decision to make, about whether to lend and, if so, on what terms. see humphrey and keleher ( 1984 ), p. 79. the idea came from henry thornton ( 1802 ) and walter bagehot ( 1873 ). thornton, writing in the late 18th and early 19th centuries, saw the old lady of threadneedle street as playing a stabilising role in times of crisis, to prevent a rapid reduction in credit caused by a shrinkage of the deposit base of the banking system. bagehot ’ s classic lombard street appeared in 1873 with what has ever since been seen as the consummate statement of the responsibility of the lender of last resort. for bagehot, it was clear that the bank of england should lend substantial liquid resources on a secured basis to a financial institution that had reasonable asset quality ( i. e. was solvent ) but which faced short term funding difficulties. bagehot ’ s dictum was “ lend freely against good collateral at a high rate of interest ”. it is frequently quoted still, and has been referenced more often over the past year than for a long time. 7 the question is how to put it into practice. even leaving aside the obvious potential difficulties in assessing solvency in real time, the bagehot formula leaves open two important questions : • what is “ good ” collateral? and • what is an appropriate rate of interest? the collateral involved is not necessarily going to be the standard sort of liquid assets. by definition, much of that collateral may already have been used before the bank reached the point of needing a loan of last resort. so the assets in question are likely to be some part of the bank ’ s loan book, or some physical asset of the bank. presumably it is “ good ” if it is priced at a value that could be realised