the international markets has become much more expensive. we have also been reminded that markets move in cycles, and the fallacy of some people who advocated a “ decoupling of emerging markets ” or that “ the business cycle has been conquered ” has been proven to have widely missed the point. what is the lesson to be learnt? the lesson is that prolonged periods of high asset growth that are not fully justified by trends in the real sector are bound to correct. for example, how can house prices continue to grow at double - digit rates if economies grow by two to three per cent per year? how can the balance sheets of banks consistently grow four to five times faster than the underlying economy? how can off - balance sheet activities of banks consistently outpace on - balancesheet growth without signalling some sort of distortion? how can profit targets and bonuses keep on rising year after year, while the underlying real economy is still very much the same? it is human nature to be more tolerant of continuous rises in asset prices than of price declines. perhaps we should be more careful in future : if growth rates and price increases are not justified by developments in the underlying activity in the real economy, asset bubbles develop, and the effects when such bubbles burst can be very serious. lesson number 3 : the seeds of the next crisis are sown in the solutions for the current one without having much choice, central banks and governments in ( mainly ) the industrialised world have taken unprecedented actions in their attempts to restore confidence in the financial system. these actions included significant liquidity injections, lowering of collateral requirements, asset swaps, longer - maturity refinancing operations, intervention in foreign exchange markets, co - operation among central banks in their market operations, monetary accommodation, quantitative or credit easing, capital injections into banks and other financial institutions, substantial fiscal stimulus packages and, in some cases, nationalisation of banks. looking at the instruments available to banks and governments, there really are only a few that have not been used in one way or another during this crisis. actions being implemented now may be the lifeline for the world financial system, but we are also well aware that they may, inherently, have negative consequences over the long term. the major central banks will have to plan their exit strategies well. governments will have to manoeuvre themselves out of their heavy indebtedness, the potential crowding out of the private sector would have to be addressed and some reasonable limits to moral hazard will have

t t mboweni : central banks and financial stability – some lessons for the future keynote address by mr t t mboweni, governor of the south african reserve bank, at the 48th aci world conference, cape town, 13 march 2009. * * * introduction honoured aci members, organisers, moderators, guests, ladies and gentlemen. thank you for the invitation to speak at this illustrious event. it is indeed a privilege and a rare opportunity to share some ideas about the state of the global financial system with market practitioners from across the world. it is difficult in the current circumstances to give an optimistic address. nevertheless, i will try to avoid to paint too dismal and depressing a picture and instead will focus on things that we can learn from our recent experiences, to contribute towards a better future. the mood in the global economy has changed from almost over - exuberance to the depths of a recession in less than two years. we are certainly experiencing unprecedented events and the actions taken to restore stability and trust in the global financial system are surpassing previous ones. judging from the programme of your conference, we expect that these issues will be discussed in greater detail over the next two days. this presentation will also make, towards the end, some comments about the state of the south african banking sector. it remains difficult to understand how various role players, including supervisors, central banks, rating agencies, multilateral agencies, governments, risk managers and highly competent private sector participants, failed to fully comprehend these developments that, with hindsight, were bound to bring us at some time to this point. yet, the important thing is not to apportion blame, but to try and understand how we can avoid repeating the same mistakes. there are many lessons to be learnt, and we are of the view that these lessons can be valuable not only from the point of view of supervisors and policy makers, but also that of traders, bankers and other financial market participants. clearly, as the situation is still unfolding, one can at best only talk of “ preliminary lessons ”. lesson number 1 : the sum of perfectly rational individual decisions doesn ’ t equal a perfectly rational market with hindsight, it is clear that, although individual institutions hedged, transferred and managed their risk exposures in very sophisticated ways, at a systemic level a point is reached at which it becomes impossible to fully diversify or transfer risk. the global financial system is a finite entity, and although risk can be passed around