Early on in the crisis the value of collateral deteriorated so dramatically that even the primary unsecured form of lending – interbank lending – ceased to function. Precautionary hoarding of liquidity brought about a complete seizure of many segments of the market for credit. At the same time, panic sales of assets made market liquidity disappear. Market liquidity is high when traders can easily find a price, and that price is very close to what every other trader pays for the same asset at the same time. In early October 2008 the market simply couldn’t find a value for many of those securities that had been so highly priced only a few weeks before. While available collateral was sharply down-priced, the economy-wide equity capital, which is largely valued by the market, evaporated in a matter of hours. Equity capital is what backs up unsecured money market transactions. This partly explains why the unsecured market seized up alongside the repo market. While collateralised finance can accelerate a generalised loss of confidence, it provides the guardians of stability with one more instrument of defence. In late 2008 the ECB increased its collateralised lending to compensate for the withdrawal of private lending in inter-bank transactions. To ease banks’ liquidity and balance sheet constraints, in particular, we have broadened the list of assets that we consider eligible as collateral in our refinancing operations. This has liquified a large fraction of our counterparties’ assets, which had become illiquid in the tense market conditions following the failure of Lehman.

That's why I have said after each monetary policy meeting at which we have left interest rates unchanged that reducing the country's debt is another key condition for lowering inflation. Orderly finances are the road towards a good rating, towards credibility of the country as a whole and towards a strong koruna. Third policy for a strong koruna – long-term growth policy Monetary and fiscal policies endeavour to dampen fluctuations in the business cycle. In the last three years, they have been focused mainly on finding short-term solutions to the Covid and energy crises. However, we must not forget the third variable in the equation, which I would call long-term growth policy. The long-term growth of an economy depends on its production capacity, or on supply, that is, on people and their hard work and on the capital and technology in the economy. I want people to save so that capital is accumulated for investment. I want wage growth to be in line with growth in labour productivity.7 This will increase supply, the country's potential, and the economy will grow in a non-inflationary way. Above all, if there is less debt, the quantity of money in the economy won't grow too much. This is an important condition for reducing inflation. Ultimately, such an economy should attract foreign direct investment and its exports should thrive. The result will be a strong koruna. 1 Zeman, M. (2016). Speech at the Festival exportu 2016 conference, Czechinno,  Prague. 2 See https://www.cnb.cz/cs/verejnost/servis-pro-media/autorske-clanky-rozhovory-s-  predstaviteli-cnb/Covid-a-socialismus-nebezpecny-saci-reflex-naroda/ and https://www.