quantify – and, as a result, confidence in the functioning of the financial system itself among market participants has been severely undermined. underlying the deterioration of confidence has been a constellation of – in my view – three broad factors which, although already individually known to market participants and policy makers alike well in advance of the turmoil, have reinforced one another in a way the dynamics of liquidity and financial cycles have been conceptually analysed, for instance, by tobias adrian and hyun song shin in “ liquidity, monetary policy, and financial cycles ”, federal reserve bank of new york current issues in economics and finance, volume 14 number 1, february 2008 ; and in “ liquidity and leverage ”, paper presented at the bis annual conference, june 2007. in related work, hyun song shin together with david greenlaw, jan hatzius and anil kashyap “ leveraged losses : lessons from the mortgage market meltdown ”, paper for the 2008 us monetary policy forum, february 2008, have assessed the current episode in some detail. that almost nobody could have foreseen. these factors included an abundance of liquidity that underpinned a build up of leverage in the financial system, an increasingly interwoven and complex financial system the growth of which was fed by financial innovation and some financial agents ’ incentives that were aligned against prudent practices. with the benefit of hindsight, it is worth recalling that public authorities – and the ecb in particular through its semi - annual financial stability review – issued clear warnings on the under - pricing of risks in some segments of the market already in early 2007. equivalent warnings were largely communicated by other central banks, and i had myself, as chairperson of the global economy meeting of central bank governors, regularly expressed the view, on behalf of my fellow governors that our judgement was that there was a significant under - pricing of risks in general in global finance. we should not lose sight of the fact that the first factor – and the driving force behind the substantial rise in financial leverage – was a significant ex - ante excess of savings over investment in the global economy. 2 in time, this abundance of capital chasing investment drove an increasingly aggressive “ hunt for yield ” which was reflected in a surge of demand for and supply of, among other assets, highly complex financial products. 3 financial leveraging processes of the type we have just witnessed are not new. as has been argued by many in the international community, the period preceding the current financial

savings accounts are foreign - owned and, to tell the truth, their savings can be taken out of the country as there is no authority that would force those banks to grant credits in serbia against such savings. on the other hand, though pension funds are long - term investments similar to those that banks engage in – it is the state which takes care of the voluntary pension funds and life insurance funds today and will continue to do so in future. the question arises as to why this is so? does the state of serbia have a proven track record over the last fifty years of expertise in making profitable investments or do we have some special skills which are superior to those of the top - ranking investment funds worldwide? - we have sold our milk farms, yet agriculture, we say, matters to us, cement producers are of no interest, yet we want to increase housing construction and building in general. citizens of serbia have been deprived of the opportunity to smoke home - grown tobacco, yet we would not let go of the eps, or part of it, of telekom srbija, one of the three operators that seems to be the state - interest, not to speak of the nis – a veritable national treasure! why? what is the rationale behind all of this or have i missed something over the last 2 to three years or, as it may be, have others changed? generally speaking, in terms of big public enterprises, the government has four functions : - it is a majority owner, - it manages those enterprises, - it supervises their operations and, most importantly - it adopts the overall legislative framework that is relevant for their operations! the latter two functions, i. e. supervision and adoption of the legislative framework, remain within the remit of the state independently of the former two functions. to illustrate, we have retained those same functions in relation to banks as well. if the sole aim of the government is to maximize budget revenue, the whole matter seems to be rather simple – we need to sell the minority share today and commit to privatize the remaining portion in several years time. but what is more important, the state needs to surrender management of those enterprises to their majority owners! this at the same time means that somebody other than the state, i. e. the majority owner, will be making all the preparations for putting such enterprises on the market, implementing their reorganization, undertaking measures to increase their price. it is more and more often that we hear