The crisis also emerged as a crisis of securitisation. Securitisation is an old and successful technique used to refinance a range of loans. What was new about it is that it got used extensively in highly unstable financial structures, which were financing short-term assets that were illiquid, complex, and whose value proved to be uncertain and contingent upon models. The instability of such structures was largely masked. Indeed, cheap money allowed easy refinancing of poor quality debt and of assets with uncertain value. Also, favourable ratings and credit enhancements artificially boosted the quality of loans underlying structured products. The rise in defaults on such loans, first on subprime mortgages, triggered a chain of reactions whose consequences are still unfolding now. Credit protections proved illusory. Liquidity dried up much more quickly than it had appeared. Rating agencies massively, suddenly and sharply downgraded products which until then were deemed of the highest quality. The demise of the “new” securitisation chain highlights two fundamental realities. The first one is that far from being spread across the whole system, credit risk was implicitly or explicitly concentrated in the hands of specific institutions, foremost among which were the major investment banks. Hence the successive waves of depreciations of structured products, imposed by the accounting rules in place, with these depreciations in turn fuelling doubts about counterparty risks and solvency, liquidity constraints and further falls in asset prices. The second reality is that recent financial innovation served mainly to increase leverage in the system. Signs of this are many.

This reaction seems to reflect the incentive of managers and shareholders to  23  Indeed, in the context of the recent turmoil, while the annual growth in undrawn credit lines, following an increase up to mid-July 2007, has been on a declining trend and moved into negative territory in the course of 2008, the annual growth in the draw-downs of credit lines has been increasing up to the third quarter of 2008. 24  This is based on information derived from the Eurosystem’s Bank Lending Survey. favour remuneration on equity and human capital, rather than long-term investment. This is not in line with the macroeconomic objectives. This is why we insist that the profits made in these months by the banking sector – which were obtained thanks to the interventions by the policy authorities to keep the system going, and thus ultimately by the taxpayers – should be used to increase the capital rather than to reward the banks’ managers and shareholders. This applies not only to banks that have received direct assistance through guarantees and public capital injections, but also to the indirect benefits obtained as a result of low interest rates. 5. Conclusion  The pre-crisis period was marked by unsustainable credit policies by the banks and, more generally, by the financial system. These policies were encouraged by inadequate supervision and slack prudential regulation, and also by the excessive influence the financial system had on regulatory mechanisms. This caused the biggest crisis of the post-war period.