inflation is not a sufficient condition for ensuring financial stability in the long run. past experience appeared to have confirmed the opinion that inflation is the major source of financial instability. high inflation episodes were usually accompanied by pronounced financial instability and banking sector crises or were followed by recession after the authorities took inadequate measures to curb inflation. the current global financial crisis became manifest after nearly two decades of relatively low, stable inflation. a number of factors caused low inflation to coexist with ample liquidity. the latter, along with the overly high level of savings, helped keep interest rates and volatility at bay. all this translated into a new financial texture, in which the bank intermediation model shifted away from " originate and hold " to " originate and distribute ". the new products and institutions that changed the fabric the financial system was made of until three decades ago led to the outbreak of the current financial crisis. the financial crisis was triggered by the developments in the us subprime mortgage market, as i have mentioned earlier. in turn, it broke out due to the fact that the federal reserve system, given the above - mentioned conditions, had no other option but to increase interest rates with a view to maintaining low inflation. with the new financial texture however, rate hikes brought about the emergence of the financial crisis. in view of the above, my opinion is that ample liquidity changed the financial system to the point where monetary policy found itself trapped. inaction would have resulted in higher inflation. the actions taken brought about financial instability. if regulation and supervision had prevented the excessive build - up of risks by investors, interest rate hikes could not have prompted financial instability. such developments point to the need of efficient cooperation between monetary policy, on the one hand, and regulation and supervision, on the other, a fact that failed to materialise over the past years in some of the world's leading economies. monetary policy was sometimes overly loose, also in regard to the regulatory and supervisory framework in place. 2. regulation and supervision trail behind the markets at intervals. markets always find a way to innovate because of the ongoing competition among economic agents to meet real needs. innovations enhance the efficiency whereby such needs are met and that is why the innovation process will never cease. even if confronted with administrative barriers, markets will still identify solutions to meet demand. a clear example in this respect was the nbr's attempt at slowing down the frantic pace of forex - denominated loans. we resort

mugur isarescu : nine lessons from the current financial crisis speech by dr mugur isarescu, governor of the national bank of romania and member of the romanian academy, during the session titled “ what lessons can be learned from the current economic crisis? ”, organised by the economics, legal and sociology department within the romanian academy, in co - operation with " costin c. kiritescu " national institute of economic research and the ” esen reflection group ” romanian national committee, romanian academy, bucharest, 14 april 2009. * * * your excellency, mr. president of the romanian academy, dear colleagues, ladies and gentlemen, i have recently talked about the causes of the current financial crisis and the manner in which it affects the romanian economy at babes bolyai university in cluj - napoca and transilvania university in brasov. let me just recall here that the current crisis on the us subprime mortgage market was only the trigger of the global financial crisis. its root causes were both macroeconomic and microeconomic in nature. plentiful liquidity was the catalyst for the merging of multiple microeconomic causes such as securitisation, financial deleveraging, rifts in the business model of rating agencies and excessive deregulation, which resulted in today's financial crisis. world economies are hit by this crisis to various extents, depending on the vulnerabilities of each and their exposure to toxic assets. the response to the crisis is contingent upon the fundamental principles we believe in, the available resources, the institutions and the instruments we can make use of. a short list of the lessons should reflect all these aspects : what we have learned or think we have learned about the causes of the crisis ; about the efficiency of the institutional texture and the array of instruments at hand ; and, last but not least, about the most appropriate positioning in the event of a crisis. with these criteria in mind, i will refer to nine lessons, of which seven are universally valid and two hold particularly true for emerging economies, such as romania. in order to root out any possible confusion, i would like to point out from the very beginning what these lessons do not deal with. first, they do not address the issue of shorter or longer economic cycles and do not suggest that a crisis means the end of an economic cycle. second, the lessons do not provide an answer to the question whether we could ever avoid a financial crisis. 1. low