react and when. a number of arguments may be quoted for and against undertaking action by central banks during a boom phase of a bubble 2. i enumerated them in my book on globalization 3. on this opportunity, i wish to quote the three premises which, according to donald kohn 4, the federal reserve vice chairman, are necessary to justify the activities undertaken by central banks to pursue this aim : borio c., lowe p. asset prices, financial and monetary stability : exploring the nexus, bis working paper, no. 114, july 2002. see references at the end of the speech. rybinski k., globalizacja w trzech odsłonach, difin, warszawa 2007. kohn d., remarks by donald kohn at monetary policy : a journey from theory to practice, an ecb colloquium held in honor of ottmar issing, 16 march 2005. • a central bank must be able to identify bubbles on an asset market in a timely fashion with reasonable confidence as to the adequacy of the findings of its analysis, • there must be a fairly high probability that a modestly tighter policy will help to check a further expansion of speculative activity on a given asset market, • the expected improvement in future economic performance must be sizeable and bigger than expenses disbursed by the economy as a result of conducting those activities. the last condition points to the restricted use of interest rates for the purpose of bursting a bubble, since the level of interest rates has a bearing not only on decisions taken by entities directly engaged in the process of forming a bubble but in fact on all the entities operating in the economy. to evoke a vivid picture, the use of interest rates to this end may be compared to the use of an atomic weapon in the battlefield – for an atomic bomb makes no distinction between friend and foe. donald kohn ’ s conditions are not easy to meet. therefore, the opinion now prevails that supervisory authorities must enhance their macroprudentail activities 5. consequently, one of the conclusions is to take recourse to supervisory instruments with a view to bearing on decisions of those market participants which are primarily responsible for bubble formation and report to supervisory authorities. by way of illustration, although the supervisory authorities do not interact with financial institutions which extended a large part of subprime loans or with arbitrage funds which purchased instruments backed on those loans, they continue to oversee the

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