course, without the integrated financial system, deficit countries would not have been able to maintain the persistently high private and public spending we observed in the decades before the financial crisis. by implication, export - oriented countries accumulated unprecedented amounts of wealth abroad, even though the underlying mechanisms were quite different. naturally, in this global setting, financial innovation went hand in hand with the transfer of huge amounts of funds from surplus to deficit countries. it is important to note that the emergence of current account deficits and surpluses is not bad per se. for an economy with an ageing population, for example, current account surpluses and the associated accumulation of net foreign wealth might well be a reasonable and efficient market outcome as its consumption rate is expected to grow in the future. as long as the global distribution of production and consumption reflects undistorted saving and investment decisions that put capital to the most productive use, it contributes to global growth and prosperity. in the same vein, financial innovation generally has positive effects, as it provides access to high - yield investment projects and thereby allows better risk sharing and lifecycle consumption smoothing. however, we know that in reality both processes have not always functioned that well. the undervaluation of exchange rates due to fixed exchange - rate regimes in some emerging market economies as well as the false perception of wealth which accompanied the emergence of asset price bubbles have distorted the global distribution of production and consumption and caused a build - up of global imbalances. in addition, the financial crisis has revealed serious deficiencies in the process of financial innovation and international risk sharing, which were not only harmful and inefficient per se but also further promoted the build - up of global imbalances. instead of reducing risk and increasing transparency, the process of global capital transfer via highly structured products encouraged savers to accumulate more risk than they were aware of and than they could afford, which in turn reduced borrowers ’ discipline rather than ensuring it. the paper by mendoza and his co - author “ financial innovation, the discovery of risk and the us credit crisis ” presented at this conference sheds light on the underlying mechanism by which insufficient knowledge about the true riskiness of the financial environment – which was, as we know today, the rule rather than the exception in the years preceding the financial crisis – can lead to a period of over - optimism in the financial markets. in this situation, investors are inclined to underestimate the deterioration of economic fundamentals and to over - borrow. the following read

the excellent response that has been generated. ladies and gentlemen, the ball is now in your court to enliven this conference through your input and to use it to your own benefit. the expectations made of economic analysis are at least as high as those made of payment and securities settlement services. let us live up to the olympic motto of “ citius, altius, fortius ". for my part, i look forward to encountering multiple ingenious analyses and ideas and a lively exchange of information. thank you for your attention. 3 / 3 bis central bankers'speeches