axel a weber : reflections on the financial crisis text of the mais lecture by professor axel a weber, president of the deutsche bundesbank, at the cass business school, london, 13 may 2009. * * * introduction ladies and gentlemen it is an exceptional honour for me to be invited to give this year ’ s mais lecture here at city university. and it is a very welcome opportunity for me to present my reflections on the financial crisis. the events that have been shaking financial markets since the summer of 2007 and which escalated markedly in september 2008 are occupying the attention of governments and central banks worldwide on an unprecedented scale. while it is certainly true that attempts to contain the financial crisis and thereby prevent financial market tensions from creating a vicious circle for the real economy is a challenge for monetary policymakers in nearly all areas, i would argue that, for monetary policy in the euro area, the challenges may be even larger than for other industrial economies. when we recently celebrated the tenth anniversary of the launch of the single currency, it was often stated that the first ten years of the euro have been a notable success with regard to price stability, trade and financial integration in europe. however, it was also said that the years ahead are likely to pose an even greater challenge. challenges for monetary policy and indeed, as i have argued before, the challenges we are currently facing are, in many respects, more demanding than anything else in the euro area ’ s first ten years. to that end, it is my firm belief that the value of monetary union has never been greater than during this financial crisis. try to imagine what would have happened without the single currency. probably, foreign exchange markets may have been subject to speculative attacks. currency fluctuations may have aggravated both the financial crisis and real economic tensions – and do not forget the political turbulence implied by such currency tensions. the financial crisis confronts policymakers with a situation of uncertainty in a very profound sense. such knightian uncertainty means that past experience is not of great value when deciding on appropriate policy measures. in such an environment, policy has to strike a difficult balance between short - term and long - term needs. more specifically, in the case of monetary policy, there is, on the one side, a need for resolute action to counter the consequences of the crisis. on the other side, such actions should not undermine the longterm foundations of monetary policy, such as the central bank ’ s credibility. striking that balance is not only key to monetary policy

, but also to other policy areas, such as fiscal policy and policies that aim to stabilise the financial system. and the appropriate balance is not independent of the institutional background against which these policies operate. this is all the more true of emu, where the institutional setting is still comparatively young, the political balance between monetary policy and fiscal policy is more complex than in other mature economies, because it is characterised by the coexistence of a supranational monetary and autonomous national fiscal policies. these considerations have to be kept in mind when talking about appropriate policy responses. the responses may differ among central banks even in the face of common economic shocks because of the differing institutional frameworks within which monetary and fiscal policy operate. thus, i would like to go on to elaborate somewhat on the challenges for monetary policy, on the approach we have taken in the eurosystem, and on lessons to be learnt for monetary policy in the longer term. 2. 1 a brief account of the financial crisis when looking at the underlying causes of the recent tensions in the global financial system, numerous culprits have been identified : securitisation, quality of risk management, credit rating agencies, compensation schemes, accounting standards and even expansionary monetary policy – to name but a few. i am extremely sceptical about any monocausal explanation. instead, i believe that a cocktail of various ingredients generated the shock waves that have rocked the global financial system. a key factor was a combination of new and complex instruments for transferring credit risks, and the “ originate and distribute ” business model of credit institutions. it has now become clear that the “ originate and distribute ” model can actually improve the resilience of the financial system if, and only if, a high - quality standard is maintained at all levels of the transfer process, and no new concentrations of risk arise. since the outbreak of the financial crisis, however, we have learned about a series of distorted incentives, which manifested themselves in lax origination standards for products such as subprime mortgages and in some investors ’ excessive reliance on credit ratings. in the end, securitisation, as claudio borio from the bis aptly put it in 2008, has, ultimately, “ distributed fear rather than risks ”. however, while financial innovation has undoubtedly magnified vulnerabilities in the global financial system, there is more to the present financial market turmoil than the proliferation of structured finance products. arguably, the “ originate