this, let me go through a list of episodes that highlight how a “ duck ” can be recognized by low interest rates, strong credit growth, high debt levels and sharply rising asset prices. having to be selective, i will pick out four historical episodes, before turning to the financial turmoil that started in august last year : the housing bubble in the netherlands in the 1970s the japanese asset bubble in the 1980s the dot. com bubble in the united states in the 1990s the boom in the dutch housing market in the 1990s. the housing bubble in the netherlands in the 1970s banks and households in the netherlands tend to forget that in the 1970s we had a real estate bubble that burst violently. in 1975 - 76, the dutch mortgage and housing markets went through a period of abnormal growth. low – at some point even negative – real interest rates in a context of high inflation supported a sharp rise in demand for housing, while banks and insurance companies pushed households to take out as high as possible loans. 1 financial innovation, which created new forms of mortgages, also spurred credit growth, as did the extension of governmental guarantees from mortgages for new houses to all types of house purchases. household debt and house prices rose sharply. dnb was clearly worried about these developments. the explosive mortgage growth, which peaked at an annual rate of 29 % in 1976, and the support it had received from governmental policies, were highlighted in 1976 in our annual report. 2 an attempt to introduce credit restrictions was initially thwarted by the government. when they were finally imposed in 1977, they contributed to slowing mortgage lending, but it was too late to prevent a collapse of the dutch housing market. in 1976, house prices started to tumble, as interest rates rose groeneveld ( 1997 ). see de haas et al ( 2000 ). and the economy went into a recession. by 1983, house prices had fallen by around 25 % and mortgage lending stopped growing. the japanese asset bubble in the 1980s the japanese asset bubble of the 1980s is a trauma that has had an important influence on policy makers around the globe. in the second half of the 1980s, asset prices – most notably equity and housing prices – rose sharply and bank lending grew at a fast pace. these trends occurred against the background of an overheating economy, while inflation remained subdued, mainly because of the rapid appreciation of the yen. 3 the aggressive lending behaviour of over - optimistic banks in many ways resembled that of dutch banks in the mid1970s. interest rates

##berger, which were published in the 1970s, or, even further back, to the business cycle theories dominant in england in the 1920s, and hayek ’ s work from the 1930s. the third element relates to the high levels of debt that can result from a prolonged period of strong credit growth, and which make the economy vulnerable to negative shocks. in my view, the importance of the stock of debt is a manifestation of a more general phenomenon, whereby in a context of disequilibrium – such as the accumulation of financial imbalances – stocks dominate flows as determinants of macroeconomic dynamics. when critical stock - flow ratios become very large, financial market players may at first become suspicious and then very rapidly flee into holdings of liquid assets, thus triggering a financial turbulence. the fourth ingredient is sharply rising asset prices – typically in equity or real estate markets. while an asset price bubble is notoriously difficult to identify, here again deviations from some form of historical trend can give some guidance. in an international dimension, sizeable current account deficits and high levels of international debt can point to imbalances that can have disruptive effects. while we all know how this can play out in emerging market economies, such episodes also occurred in industrial economies – just think for example about the nordic banking crises in the late 1980s – early 1990s. in the current context of global imbalances, it has been argued that the large current account deficit and rising international debt in the united states reflects the large decline in savings by us households during the housing credit bubble. but how can we quantitatively verify the existence and magnitude of financial imbalances along these five dimensions? this is a challenge for policy makers, academics and market participants alike. there is an empirical literature that suggests that financial imbalances might be detected but its findings are far from undisputed. in my view, there is definitely a need for more in - depth research that helps us understand the dynamics of the accumulation of imbalances, even if this research comes up with interval estimates rather than point estimates. these margins ( or bands ) might be large but exceeding them would definitely be a sign that something is going wrong. but even if imbalances might not be accurately assessed by empirical research, based on my personal experience as a policy maker there is clearly a sense in which they can be detected. “ if it looks like a duck and quacks like a duck, chances are it is a duck ”. to illustrate