Cleaning up after the exuberance
Speeches by central bankers tend to be long on theory, short on concrete predictions. It goes with the territory.
Mervyn King's speech to bankers last night at the Mansion House doesn't exactly break with that tradition. But it has some forthright advice for the G20 - and for Lord Turner, whose big picture recommendations for the financial system are out today.
His first message is take it slow. "Whatever exuberance - rational or irrational - that existed has been destroyed by the crisis. So we have time to reflect before we decide on the shape of a new regulatory system."
Translation: relax, no-one ever made a bad loan in a recession.
That could be taken as a gentle dig at those enthusiastic officials - Brits among them - who have wanted the G20 to produce a more detailed framework for international banking regulation than the broad outline agreed last weekend in Horsham.
The governor is backing the American view that this is something too important to rush.
In outlining the broad challenges for reform, the governor covers some well-trodden ground in a typically thoughtful way. But I was struck by the barely-concealed irritation at the idea that a few technical changes would have prevented the crisis. In fact, he thinks it would have taken a herculean and highly implausible act of political will.
Consider the problem of "procylicality", a fancy term for the idea that investors tend to be overoptimistic during the boom and excessively gloomy during the bust.
It's widely agreed that global monetary and regulatory policy was too procyclical in the lead-up to the crash. Interest rates were kept low, and most financial regulators did little to 'lean against the wind' as leverage - i.e. debt taken on to invest - was built up.
How could we have done things differently? Well, fiscal policy could have been a lot tighter in both the US and UK, but that's a story for another day.
Monetary policy could have been tighter. There was discussion of using interest rates to take the air out of the house price bubble on both sides of the Atlantic. But, as everyone now knows, the Bank of England ended up following the Greenspan view that it was easier to clean up after an asset boom than to prevent it from happening at all.
Sir John Gieve, the outgoing deputy governor, said baldly last month that this had now been proved wrong. It certainly sounds pretty stupid from the standpoint of 2009. But Gieve's erstwhile boss has had no such conversion. He still thinks the costs to the real economy would have been too high.
Jacking up policy rates might not even have had much impact on long-term lending rates, in a world of exuberance run amok. Would we really have sat by as unemployment rose, in the name of "restraining growth in financial sector balance sheets"? He thinks not.
Instead of distorting your monetary policy, he thinks you need another tool. And so do a lot of other people these days. Lord Turner will say the same later today.
But even countercyclical capital regulation is a lot easier said than done. Spanish bank regulators have been praised for their "dynamic-provisioning" approach, which made banks provision against profits in the good years, to build up reserves for the not so good ones. But that only seems to have given their larger banks an extra buffer going into the crisis of about 1.5% of assets. Most banks have lost a lot more than that.
There are other ways to be counter-cyclical; Turner will list a few. But King's larger point is that even with the best toolkit in the world we shouldn't fool ourselves that it would have been popular - or even politically feasible. Indeed, the more effective it was at damping the boom, the more the entire financial and political establishment would have been complaining about it and calling for repeal.
After all, it wasn't long ago that prominent Conservatives were calling for city regulation to have an even lighter touch and, as King himself notes, New York was beating itself up for being more heavy-handed than London. This was a time when "virtually the entire weight of opinion, not only in this country but also abroad, was in favour of the expansion of financial services".
The bottom line is that if we want to avoid the next bust we have to be prepared to pass up the boom. Is there any chance that we will be? The governor thinks that "simple and robust policy tools" will help. And a system of "constrained discretion".
But down the road, when memories of 2008 have faded, it is hard to believe they will be enough.