know that sometimes we become over - confident and our actions become excessive. that is why we have developed pre - set mechanisms to put on the brakes. the private sector has various devices. for example, financial institutions have internal risk management sections. market discipline is extended by shareholders, creditors and counterparties to guard against excesses by senior management of financial institutions. meanwhile, central banks and financial regulators and supervisors also function as a braking device. unfortunately, in these crisis episodes, the devices in both the private and public sectors failed. the failure of these two sets of devices entails very important issues, but in the interest of time, i will focus only on the public - sector device. as a central banker, i believe we need to examine critically and thoroughly the failures of central banks and financial regulators and supervisors. conduct of monetary policy first of all, let me touch upon the conduct of monetary policy. there has already been considerable debate about the relationship between monetary policy and emergence of bubbles. one thing is clear : over - confidence is the core factor which breeds a bubble. in that sense, bubbles do not transpire from expectations of a continuation of low interest rates alone. this is, however, only a half of the truth. the other half is that bubbles do not materialize without expectations that low interest rates will continue. for me, the key question, which applies to many central banks including both the bank of japan and the federal reserve, is that, why we, as central banks, maintained interest rates at such a low level, in spite of the uneasiness we felt at that time toward the bubble - like symptoms. there are three possible reasons. first, the economic environment has evolved in a way that imbalances in the economy do not readily show up in the form of changes in the price of goods and services. the success in attaining price stability lent support to public confidence in the central bank ’ s conduct of monetary policy. as a result, inflation expectations of private sector economic entities became well - anchored to a low target inflation rate. thus, imbalances in the economy began see tett ( 2009 ). to appear in forms other than inflation of goods and services. imbalances materialized in different forms such as increases in asset prices and growth of credit extension. second, some political, economic and social dynamics influenced central bankers, and it became difficult for them to conduct monetary policy based on factors other than the inflation rate. this mechanism is quite subtle. the logic that

the long - term health of the japanese economy. this “ cycle of confidence ” seems to apply not only to the japanese economy, but also to the us economy. since the mid - 1960s, the performance of the us economy started to deteriorate, and the late - 70s and early - 80s were the worst period, facing both high inflation and low growth, or in another word, stagflation. however, policy efforts to revitalize the us economy began precisely during this testing time. chairman volcker ’ s efforts to tame inflation and deregulation under the reagan administration, both were set in motion during this difficult period, and the efforts gradually began to bear fruit over a long period of time. the rate of growth of the us economy accelerated from 3. 1 % in the 1980s to 4. 0 % in the latter half of the 1990s. this economic expansion briefly paused at the beginning of the new century due to the collapse of the it bubble, but accelerated once again after a relatively short period. there was much discussion regarding the macro economy and how to interpret the decrease in the volatility of the growth rate and inflation rate. the phrase “ great moderation ” was repeatedly mentioned. in this environment, a very bullish view regarding the economic outlook prevailed. there was much debate about whether the rise in house prices was a bubble or not. however, the basic messages we repeatedly heard from both policymakers and academia here in the united states were, that “ there will not be a nationwide decline in house prices ” and that “ even if a bubble were to burst, it would be manageable through aggressive monetary easing ”. with regard to the financial system, the presumption was that the risk management of us and european banks were much more sophisticated and efficient than that of japanese banks 3. unfortunately, as we all know now, such optimistic views proved to be wrong. both the japanese case and us case show how damaging over - confidence can be. why couldn ’ t policy makers put on the brakes? i have taken you through a quick assessment of the recent bubbles in japan and the united states from the perspective of a “ cycle of confidence ”. but looking around the globe, such episodes are not confined to these two cases. just looking back at the last quarter of a century, there was the bubble and its collapse in the nordic countries during the 1980s, and the asian miracle followed by the asian currency crisis in the 1990s, to name a few. human beings