christian noyer : world financial crisis – public and private strategies to overcome the crisis speech by mr christian noyer, governor of the bank of france, at paris - europlace, dubai, 22 january 2009. * * * ladies and gentlemen, it is a great pleasure for me to be here and share some thoughts on the financial crisis and on solutions that may be found to overcome the situation. it is too early to draw definitive lessons from recent events in financial markets. it is however vital to start reflecting on the experience of the last few months. even more in periods of tension than in normal times, action and reflection should reinforce one another. it is at the very moment of managing the crisis that we lay the foundations for the future financial system. having said that, i propose to discuss with you two main topics : • the nature of the financial crisis • the policies implemented to address it both from a public and a private sector perspective. the nature of the crisis the crisis first emerged as a liquidity crisis. the first symptoms appeared at the beginning of august 2007 when serious disruptions surfaced on the inter - bank market in the western world. more than a year later, tensions on money markets are still with us. recent months have witnessed abnormal levels of spreads, a shortening of maturities, and the contraction, or even closure, of some market segments. through spill - over, these tensions are also affecting non - financial corporations and, more broadly the financing of the economy. they also have spilled over to emerging market economies, which had until the autumn 2008 remained largely unaffected. the crisis also emerged as a crisis of securitisation. securitisation is an old and successful technique used to refinance a range of loans. what was new about it is that it got used extensively in highly unstable financial structures. these were financing short - term illiquid and complex assets whose value proved to be uncertain and contingent upon models. the instability of such structures was largely masked. indeed, cheap money allowed easy refinancing of poor quality debt and of assets with uncertain value. also, favourable ratings and credit enhancements artificially boosted the quality of loans underlying structured products. the rise in defaults on such loans, first on subprime mortgages, triggered a chain of reactions whose consequences are still unfolding now. credit protections proved illusory. liquidity dried up much more quickly than it had appeared. rating agencies massively, suddenly and sharply downgraded

or will it persist? a temporary slowdown is, as you know, the base case for the ecb, which recently revised down its staff macroeconomic projections for real gdp growth substantially in 2019 but only slightly in 2020. third, “ strategic ” uncertainty in some cases, the uncertainty we face is about what other policy makers will do. this is particularly pernicious when unpredictability is considered a source of strategic advantage. for instance, a seemingly credible threat by one party to take actions that lead to mutual disadvantage can prompt concessions from the other, ( or not ). a former american president, 1 / 3 bis central bankers'speeches richard nixon, called this his “ mad man ” theory when applying it to the war in vietnam and there are echoes of this idea in current international trade disputes. such behaviour undermines multilateralism which has been an important source of stability and growth over many decades. if strategic uncertainty is a source of unilateral advantage, it will not dissipate but remain a source of latent policy risk. last, “ structural change and monetary policy ” uncertainty there are fundamental structural changes occurring, notably in the euro area economy but also elsewhere, that are poorly understood. the ongoing demographic transition, for example, is changing employment, investment and saving decisions, which will probably lower the natural rate of interest. the monetary policy transmission mechanism also seems to be changing. a sustained period of accommodative monetary policy has boosted growth and employment and is finally showing up in nominal wage growth : this first part of the phillips curve is at work. but higher nominal wages have not yet been passed through to core inflation. it should eventually, but the more pertinent issues – of when and by how much – are unclear. there is, thus, not a single mechanical relationship between monetary policy instruments and inflation, rather a distribution of likely responses. furthermore, differences in demographic trends and structural policy choices between countries in the eurozone ( or states in the us ) may create or perpetuate some heterogeneity across large monetary areas, an issue you will discuss tomorrow morning. 2 – how to respond to such uncertainties? without pre - empting discussions, let me flag some possible responses. i ’ ll first, address the issue of policy uncertainty between central bankers. so far, it is, fortunately, the simplest one : we are not in a so - called “ game of chicken ” and clarity about policy intentions between ourselves are