that there is yet again a huge under - pricing of risks in the financial system and, therefore, it is not a question of if, but when, generic asset bubble caused by manifold increases in balance sheets of central banks will burst. specifically, currently the global liquidity has become a bigger concern than it was in pre - 2007 period what with ultralow and near - zero policy rates and major central banks ’ balance sheets 1. 50 to 3 times their pre - 2007 levels, adding about usd 4 trillion in incremental central bank liquidity. worse, us banks are reportedly keeping excess reserves of us $ 1. 5 trillion with the fed rather than lend to small businesses and households. alongside, non - financial corporations in the us are reportedly sitting on cash and liquid assets worth usd 2 trillion which they do not know what to do with it! in this background of huge deluge of global liquidity, there are unmistakable signs of asset bubble inflating again in almost a replay of the last global financial crisis. as the table i shows, as of 14 september 2011, the over - valuation of gold – what we can also call gold bubble – with reference to 7 competing asset classes varied from 84 % against highly correlated metal prices proxied by lmex, 90 % against wti crude, 123 % against us treasuries proxied by jp morgan index, and roughly 250 – 300 % against credit default swap index, dow jones, the us dollar index dxy and the us home price case - shiller index. ( to detect an asset bubble ( gold in the present case ), fair value / price of gold with reference to competing asset classes like us dollar, us stock market, crude oil, the us treasuries, credit risk, base metals, and us house prices, proxied, respectively, by the dxy ( euro, pound sterling, japanese yen, swiss franc, canadian dollar and swedish krona ), the dow jones industrial average ( djia ), wti spot, j. p. morgan bond index, cdx ig, a cds index for investment grade us bonds, london metal exchange ( lmex ) ( nickel, tin, aluminium, copper, zinc and lead ) and s & p case - shiller index, has been computed. the table i is self - explicit. this intuitively appealing methodology of computing fair value is reasonably robust and rigorous based as it is on the assumption that bis central bankers

react to their views and their policy advice. the initial cyprus bail out was an example. media reported that the imf was against the tax on “ insured depositors ” but yet imf let that go forward with damaging consequences as we now know. bis central bankers ’ speeches • imf should talk more to financial market participants – not just large banks but other players – hedge funds, pe firms, amcs etc. question 3 : how should the imf tailor its advice to different economies across the world? is it doing a good job of this? response • i would like to emphasize two points here. first, how far is imf advice based on country - specific factors? second, is the fund ’ s surveillance even handed? • viewed from these two standpoints, there is a lot of scope for improvement. according to the ieo survey, authorities of many large emerging market economies found that the surveillance process added little value and offered very limited perspectives and that their advice failed to take into account country - specific factors. • advice by the fund should stem from a complete understanding of not only macroeconomic, but also social and political settings of a country. • advice should be founded on hard evidence and driven by facts. ideology should not play any role in analysis of facts. the fund also needs to exercise extreme caution when it gives advice based on models. this is because in many cases even small changes in model specifications, definitions of variables used, and time periods used in estimation can lead to significant differences in the results. at times, models are also not amenable to country - specific factors. • the impact of imf surveillance works primarily through debate with country authorities and public dissemination of its findings that is expected to condition market and public response to imf advice, and thereby work indirectly on policy making. more transparent and wider dissemination of balanced surveillance analysis may be an important means to enhance the effectiveness of surveillance. the imf must be open to criticism and advice. • now let me come to the issue of even handedness, which, i believe, is necessary to enhance the imf ’ s legitimacy in its role as a trusted advisor. surveillance is often believed to have less impact on large member countries relative to smaller ones ( in terms of size of gdp or population ). it is necessary to evaluate how this issue has been addressed since the 2011 tsr so as to ensure even handedness. in a recent ieo report on “ role of imf as a trusted advisor