into 2007. 2. if one means by monetary policy the instrument of short - term interest rates, then i agree that monetary policy is not well - suited to deal with asset bubbles. but this suggests that it might be better for central bankers to examine the efficacy of other instruments in their toolbox, rather than simply ignoring the development of asset bubbles. 3. if existing tools are judged inadequate, then central banks should work on developing additional policy instruments. let ’ s take the housing bubble as an example. housing prices rose far faster than income. as a result, underwriting standards deteriorated. if regulators had forced mortgage originators to tighten up their standards or had forced the originators and securities issuers to keep “ skin in the game ”, i think the housing bubble might not have been so big. i think that this crisis has demonstrated that the cost of waiting to clean up asset bubbles after they burst can be very high. that suggests we should explore how to respond earlier. harkening back to my earlier themes, i think we can respond in a number of ways : • first, we can do a better job understanding interconnectedness. this means changing how we oversee and supervise financial intermediaries. • second, we can change the system so that it is more self - dampening. • third, we can improve incentives. • fourth, we can increase transparency. • fifth, we can develop additional policy instruments. for example, we might give a systemic risk regulator the authority to establish overall leverage limits or collateral and collateral haircut requirements across the system. this would give the financial authorities the ability to limit leverage and more directly influence risk premia and this might prove useful in limiting the size of future asset bubbles.

william c dudley : lessons learned from the financial crisis remarks by mr william c dudley, president and chief executive officer of the federal reserve bank of new york, at the eighth annual bis conference, basel, 3 july 2009. * * * in assessing the lessons of the past two years, i will focus on five broad themes that are interrelated : • interconnectedness of the financial system • system dynamics – how does the system respond to shocks? • incentives – can we improve outcomes by changing incentives? • transparency • how should central banks respond to asset bubbles? as always, my views are my own and may not necessarily reflect those of the fomc or the federal reserve system. interconnectedness this financial crisis has exposed how important the interconnections are among the banking system, capital markets, and payment and settlement systems. focus on only one part of the financial system can obscure vulnerabilities that may prove very important. for example, the disruption of the securitization markets caused by the poor performance of highly - rated debt securities, led to significant problems for major financial institutions. banks had to take assets back on their books ; backstop lines of credit were triggered ; and banks could no longer securitize loans, increasing the pressure on their balance sheets. this reduced credit availability, which increased the downward pressure on economic activity, which caused asset values to decline further, increasing the degree of stress in the financial system. the high degree of interconnectedness across the financial system has a number of implications. first, supervision must not just be vertical – firm by firm, or region by region, but also horizontal – looking broadly across banks, securities firms, markets and geographies. second, this means that supervisory practices need to be revamped. they need to be coordinated and multi - disciplinary. i think the u. s. treasury is right in proposing a systemic risk regulator as part of their regulatory reform plan. but, we shouldn ’ t kid ourselves about how difficult this will be to execute. you will need a flexible and dynamic governance process to be able to identify the important elements of systemic risk, to elevate those concerns to the appropriate level and then to act on those concerns in a timely manner. it will take the right people, with the right skill sets, operating in a system with the right culture and legal framework. i don ’ t believe creating this oversight process will be an easy task. consider, for example, subprime