Some interesting quotes from our dour old Governor (his main message is that we should anticipate lower economic growth from the impact of more intensive regulation, but that is more hum drum). First, on the growing politicisation of central banking. I feel the unstated message here is that the independence of central banking is possibly at risk:
"So some central banks, like their governments, have found themselves in very unusual terrain. It is terrain: in which the relationship between the central bank and the government is subtly changed; where the distinction between fiscal and monetary policy is less clear; from which it may be hard to exit in the near term; and a side effect of which may be wastage, over time, in some elements of market capability."
Second, he very, very tentatively canvasses lower expected returns from banks as their leverage decreases. As a quasi-bank regulator, Governor Stevens was evidently not willing to push my argument that the expected returns on equity should also fall due to the lower risk attributable to banks given the new presence of taxpayer guarantees in extremis, which Stevens argues should ideally never reappear (while making the contradictory statement that "the simple truth is that, given a big enough shock, the public backstop to the financial system has to be used"):
"Of course the costs of equity and debt may not be, and actually should not be, constant as banking leverage declines. The cost of wholesale debt should fall over time if the equity buffer, which protects unsecured creditors against losses, is larger. In time, the cost of equity may even fall with lower leverage if the required equity risk premium declines to reflect a less variable flow of returns to equity holders. All of that assumes of course that the perceived riskiness of the underlying assets is unchanged."
