that we have been vigilant from the very first day. when the problems started to appear in the financial markets, on 9 august 2007, we were the first central bank to react, taking action very quickly. bis central bankers ’ speeches in parallel, dysfunctioning financial markets have threatened to compromise our ability to guide the outlook for price stability by using our conventional instrument – interest rates. faced with this situation, over the years that followed, we have implemented a number of unconventional measures to ensure that our decisions on interest rates are transmitted to the whole economy, despite the problems observed in the financial sector and capital markets. in particular, it was to allow banks – regardless of the level of the key interest rate – to continue to lend to households and businesses. from the outset of the crisis we have established the principle of strict separation between our unconventional and our conventional measures, that is to say, our policy rate of interest. our interest rates are fixed so that we can ensure price stability over the medium term. the implementation of unconventional measures depends on the functioning of the monetary policy transmission mechanism and must respond to the degree of dysfunctioning or disruption of monetary and financial markets and market segments. as the crisis called for rapid and unprecedented action, we never lost sight of our main objective, namely to maintain price stability over the medium term for the benefit of the 331 million citizens of the euro area. all – i stress that word – all monetary policy decisions we have taken over the last 12½ years were aimed at complying with this commitment. let me elaborate on this point. as you know, in normal times, central banks mainly influence the economy and inflation by using the instrument for setting short - term interest rates. in practice, the identification, at an early stage, of the risks to price stability is a delicate task. to see it through, the ecb bases itself on a monetary policy strategy supported by several sources of information. the economic analysis we undertake enables us to synthesise information on short - term inflationary pressures from a large number of economic indicators. thanks to the monetary analysis that we also carry out, we can cross - check this information with that concerning medium - term inflationary pressures drawn from the monetary and financial indicators. these are the two “ pillars ” of our monetary policy which indicate to us the necessary steps in respect of the interest rate to ensure price stability over the medium term. the decisions we have taken in response to political pressures have demonstrated our independence. we refused to lower interest rates

backed and other related securities to deleverage. with many investors trying to do the same thing at the same time, the downward pressure on prices intensified, resulting in extensive losses, even higher margin requirements and further forced sales until the market for funding and for mortgage - backed securities largely dried up. the recent episode has shown how and why fundamentally unjustified asset price booms or excesses can occur and persist for some time. there are many lessons to be learned. some of these are new and relate to the features and functioning in practice of the “ originate - to - abreu and brunnermeier ( 2002 ). abreu and brunnermeier ( 2003 ). distribute ” ( otd ) model and the securitisation process. other lessons, however, are not new and should be relearned as they had been forgotten, including the role of excessive credit expansion and high leverage in driving the rising phase of a boom - and - bust asset price cycle and accounting for the steepness of the fall during the downturn phase. one policy - relevant question which should be addressed is whether some asset markets are likely to be more vulnerable to valuation swings and are more likely to have significant adverse implications for the stability of the financial system and the economy. i will now turn to this question. iii. the role of housing and credit markets are there particular markets that are more prone to boom - and - bust cycles and, in the event of a sharp correction, are likely to have more pronounced effects on financial and economic stability? and if so, which ones? the speculative element that could result in a mispricing of risk implies that financial market excesses are likely to have their origin in markets with longlived assets with uncertain returns such as the housing markets or the equity markets, and possibly also the market for private bonds with long maturities. moreover, asset markets that lack effective short - selling instruments, which allow investors to address overvaluations, should also be more prone to bubble - like price deviations from fundamental values. 5 what are the facts? in advanced economies, stock and house price booms seem to occur rather frequently and with approximately the same frequency. among the observed housing booms, every second one is likely to be followed by a house price bust. in equity markets, a crash follows a stock market boom only in 1 out of 6 cases. thus, boom - and - bust cycles in housing markets occur much more frequently