To make sure that bubbles never happen, one may need to impose permanently significant constraints on the development of credit or leverage, which would prove penalizing in normal times. A better – and less costly – approach would be, for supervisors, to closely monitor the financial system and preserve their possibility to intervene by establishing the kind of presumption I have just mentioned. Two approaches to macroprudential supervision As in many matters of public policy, there is a choice between rules and discretion in implementing macrofinancial supervision. There are basically two possibilities, which are not necessarily mutually exclusive. First, (the rule based approach), macrosupervision can be built through automatic stabilizers which would constrain institutions in their behaviour, regardless of their own individual situations. Examples would include contra cyclical capital requirements, for instance, as well as dynamic provisioning. As I will develop later, stabilizers should be constructed so as to act directly on the incentive to take risk and the rewards provided by risk taking. A second approach would consist on discretionary, "top down" interventions from macroauthorities. Prudential authorities would step in and impose (or relax) constraints whenever they come to the conclusion that dangerous imbalances are building up (or unwinding). We probably cannot dispense of this second approach. The difficulty to date cycles makes it dangerous to rely purely on automatic mechanisms, which cannot be precisely calibrated. Financial cycles, in particular, are driven by changes in risk appetite which are impossible to predict.

But we live in a world of second best, and even very approximate measures would do better than nothing at all. I will stop here, knowing, once again, that I have raised more questions than I have provided answers. But looking at what is happening in this very moment, in our economies, it is necessary to think "out of the box" and look at all possibilities. Those in charge of macroeconomic policies are doing just that. Those responsible for financial regulation should not hesitate to emulate them, at least partially. Thank you for your attention. References Aglietta M. at B. Mojon (2008), Central Banking, in A. Berger, Ph. Molyneux and J. Wilson (eds), The Handbook of Banking, Oxford University Press. Alessi L. and C. Detken (2009), “Real Time” Early Warning Indicators for Costly Boom-Bust Cycles: A Role for Global Liquidity, European Central Bank Mimeo. Allen, F. and D. Gale (2000), Bubbles and crises, The Economic Journal 110, 236-55. Bernanke B., M. Gertler and S. Gilchrist (1999), The Financial Accelerator in a Quantitative Business Cycle Framework, in. J. Taylor and M. Woodford (eds), The Handbook of Macroeconomics, North Holland. Blanchard, O. (2008), The Crisis: Basic Mechanisms, and Appropriate Policies, MIT Working Paper 09-01. Borio C. and P. Lowe (2002), Asset Prices, Financial and Monetary Stability: Exploring the Nexus, BIS Working Paper 114. Borio, Claudio (2008), The macroprudential approach to regulation and supervision: where do we stand? Mimeo. BIS Review 37/2009  5  Holmstrom, B. and J. Tirole (1997), Financial Intermediation, Loanable Funds and the Real Sector.