as to penalise private shareholders. an interest rate that is too high on the public injection would encourage banks to pass on these rates to the end - users, who would ultimately be paying the bill. given the state of the economy, and the difficulty to ensure a high rate of return on investment over the next few years, stock prices would be likely to suffer. it would be paradoxical if the injection of public capital led to a fall in private stock prices. the ecb has established a scheme for defining an appropriate return on different instruments that could be used for recapitalisation, which has been sent to member states and the european commission. we hope that this scheme can be adopted in all member states, in particular those in the euro area. indeed, ensuring a level playing - field across banks and countries is essential to foster the return of confidence. the japanese experience of the 1990s has shown that the major factor behind the fatal delay in bank restructuring and recapitalisation has been political infighting and the immobility of the private sector. on 12 october, the heads of state of the euro area countries met in paris and announced measures aimed at providing financial institutions with additional capital resources so as to continue ensure the proper financing of the economy. the current state of the financial markets does not allow for hesitation. leadership is required at both the national and european levels to implement the solution which is on the table. a similar, massive action is needed across the atlantic. restoring confidence in markets is the biggest contribution that the state can make to get the economy back on track. it is time to act. thank you for your attention.

lorenzo bini smaghi : restoring confidence speech by mr lorenzo bini smaghi, member of the executive board of the european central bank, on the panel : “ society, state, market : a european answer ” at the international forum economia e societa aperta “ uscire della crisi ”, organised by bocconi university and corriere della sera in cooperation with university carlos iii de madrid, madrid, 25 november 2008. * * * since the start of the financial crisis, attempts have been made to frame it within predefined schemes, based on past experiences. comparisons have been made with previous crises, starting in 1929. standard terminology has been used, such as recession, stagflation, stagnation, and more recently also deflation, sometimes without fully understanding their meanings. these exercises risk being not only useless but also counterproductive, to the extent that they lead to policy conclusions that might have been appropriate for the past crises but not necessarily for the current crisis. this crisis is different from the others because it affects confidence, which is at the root of a market economy. what is at stake is confidence in the market. on the other hand – and this can be a decisive factor – confidence in the state has remained high. this can be shown by the fact that banks prefer to buy government bonds rather than lending to each other. there are two ways to escape this crisis. the first is to replace the market economy with a different system for the allocation of resources, in which the state has a predominant role – some new form of socialism ( although there might not be many left who really remember how a socialist economy functions ). the risk is that the remaining confidence in public authorities may be lost. the second solution is to rebuild a functioning market economy, which possibly functions better than it did previously. the state has a fundamental role in rebuilding agents ’ confidence in the market. if confidence is not restored, policy actions may be in vain. and the crisis may get worse. to escape from the crisis we therefore need intervention from the state, in order to recreate a functioning market economy. however, if we have just get more state and less market we would be worse off. in the following i will try to develop this reasoning. the crisis of confidence started about a year ago, when financial market participants started to doubt each other ’ s solvency as a result of the undervaluation of risk on toxic assets, the large