, one can say that activity has always fluctuated more or less regularly. what was unexpected, however, is the rate at which activity has slackened. the downturn seems to have been accentuated by a reaction to the excessive optimism which the technological breakthrough had generated, giving rise to the notion of a new economy. we can all recall the virtually unbounded enthusiasm over the benefits that would flow from the new computer and telecom technologies. expectations of a rapid future increase in profits and incomes inspired firms as well as households in many parts of the world, perhaps above all in the united states. investment and consumption both rose and so did stock markets and production plans. this led in time to growing imbalances in the american economy, for instance between saving and investment as well as between current and more fundamental stock - market valuations. investment was probably stepped up rather too quickly. although optimism in other parts of the world did not become as excessive as in the united states, there were no doubt a good many investment, consumption and share - purchasing decisions that perhaps would not have been made if a more long - term view of economic development and more realistic expectations had prevailed. important to learn from history history has taught us that euphoric phases of economic activity tend to end in a sudden change of mood. economists of the austrian persuasion see investment as the key to the economic cycle. in connection with a technological breakthrough, firms are liable to exaggerate the innovation ’ s impact on productivity. they may overestimate the conceivable improvement in productivity, for example, as well as the duration of the upswing. as a result, growth cycles generated by new technology not infrequently culminate with undue optimism and misplaced investment. when profit expectations ultimately fall back to more realistic levels, share prices drop. corporate investment slackens as the economy ’ s aggregate capital stock is adjusted to match a more reasonable long - term return. this is accompanied by decreased household consumption, not least of capital goods, to match a more realistic assessment of the long - term development of income. the austrian school also provides us with a fundamental insight into economic policy ’ s limitations. if a technological breakthrough leads to a period when the growth of investment and consumption exceeds what is sustainable in the longer run, there is bound to be a fall - off. after a supply shock of this type, measures of economic policy are simply not capable of preventing an adjustment to a more realistic appraisal of

sharia - compliant institutions to have a real asset to back their financial assets. nonetheless, these exposures also have a downside, as the experience of the past few years has reminded us. like conventional financial institutions, some islamic financial institutions have suffered losses resulting from their exposure to real estate markets around the world. moreover, because they are frequently the direct owners and developers of real estate projects, islamic financial institutions have been exposed to wider range of risks than conventional ones. as the ifsb argued in a recent paper, the events of the past few years should have given the industry a clear signal that it must reduce its reliance on real estate as an asset class. the requirement for a real asset to back financial assets can be met in many other ways than by financing the construction of office buildings, shopping malls or luxury apartments. the industry should look instead at the scope for increasing the finance it provides for productive assets such as factories, ports, mines, and oil processing facilities. financing these activities may appear less profitable in the short - term, but may be a better proposition on a riskadjusted basis. diversification is also needed of product offerings that will allow islamic financial institutions to serve their customers better and to generate more stable revenues. surveys of the islamic financial industry tend to show that firms have a comparatively narrow range of financial products to offer their clients. developing a greater product range will not only benefit consumers. it will also create new sources of revenue that tend to be more stable than those generated by cyclical industries such as real estate. as i said at the beginning of my remarks, it is in the interests of all involved in the industry – regulators, standard setters and above all practitioners – to ensure that it rests on secure foundations. in other words, the industry must be prepared constantly to subject itself to the sort of intellectually rigorous analysis that has been the hallmark of the work of professor simon archer whose contribution to the industry we celebrate this evening. throughout his long and distinguished involvement with the islamic financial industry professor archer has assessed its prospects both sympathetically and honestly. while aiming to encourage the growth and development of the industry, he has also recognised that its long - term potential can only be realized if it rests on strong foundations. the long - run objective of a sound and stable industry should not be sacrificed to short - term gain. these sound principles are exemplified by the work that professor archer has done over the years, both with aaoifi and with the ifsb. he has