most modern risk management techniques related to derivatives and structured products. it also partly reflected inadequate information on the extent to which sub - prime exposures had infected the balance sheets of financial institutions. with the glut in supply and as housing prices fell, the value of the collaterals supporting mortgage loans eroded. higher delinquency rates on sub - prime mortgage loans triggered a wave of bankruptcies of sub - prime mortgage lenders. as bankruptcy filings by mortgage lenders mounted, unnerved investors began draining liquidity from financial markets. with banks holding on to their cash to cover losses, credit markets started to seize up. even creditworthy borrowers began experiencing difficulty in borrowing. firms / households cut back on investment and consumption, causing a slump in economic activity, precipitating a recessionary cycle. moreover, since the loans were securitized and sold to other investors as credit derivatives, the defaults in the mortgage lending market spread to the wider credit markets, multiplied several - fold by leverage. eventually, losses in subprime mortgage lending and credit derivatives would spill over to the broader financial markets and to financial institutions elsewhere that invested in us mortgage bonds and structured products. there were other factors that could have contributed to the credit crisis. mark - to - market accounting standards exacerbated selling pressures during the period of deflating house prices as banks were forced to recognize valuation losses in their balance sheets. the fragmented supervision in the united states led to lack of regulation over segments of the financial system. even credit rating agencies have gone under scrutiny for giving investment - grade ratings to securitization transactions that were backed by sub - prime mortgage loans. these high credit ratings encouraged the flow of investor funds to these securitized instruments. critics claim that conflicts of interest were involved, as rating agencies were paid by firms, such as investment banks, that originated and sold the debt to investors. however, beneath what can be seen by the naked eye is the " micro structure " or the underpinning of the crisis. there is a quote from robert shiller. he said " too little attention has been paid to the most fundamental cause ( for the housing crisis ) : the contagious optimism, seemingly impervious to facts, that often takes hold when prices are rising. bubbles are primarily social phenomena ; until we understand and address the psychology that fuels them, they're going to keep forming ". i am a believer that all these over - structures could be explained

remain a key part of the monetary transmission mechanism in the euro area. we should therefore bear in mind that these risks could potentially complicate our ability to meet our price stability mandate in the future. there are other longer - term risks to monetary policy, namely through the allocation of credit to both productive and unproductive firms. by reducing interest rates for all firms, monetary policy may indirectly permit inefficient firms to remain in business – becoming so - called zombie firms. this blunts the productivity - enhancing function of downturns to bring about “ creative destruction ”, whereby inefficient firms are forced out of business, freeing up resources to move to more efficient firms and boosting aggregate productivity. indeed, there is evidence that creative destruction was weaker during the great recession than in previous downturns3 and that zombie firms have weighed on productivity growth in some euro area countries. 4 productivity growth plays an important role in raising aggregate living standards, but it also affects the conduct of monetary policy. higher productivity growth spurs investment, and expectations of higher future income encourage households to spend more today. thus slower productivity growth requires monetary policy to lower interest rates by more than would otherwise be the case to stimulate the economy. given that interest rates are currently low, and our stock of purchases is quite large, this would restrict our ability to respond to future downward shocks. what i have just explained are the economic risks arising from a potential misallocation between productive and unproductive businesses brought about by our asset purchases. but there are also legal risks for the ecb regarding our treaty obligations. article 127 requires that we “ act in accordance with the principle of an open market economy … favouring an efficient allocation of resources ”. thus, in respecting our price stability mandate, we should only do as much as is necessary, and be aware of potential side effects from running expansive policy for too long. an important principle of an open market economy is price formation in markets through the interaction of private sector agents. it should be those interactions that ensure correct pricing, notably of credit risk, and not the interactions created by our asset purchases. it is clear that, with the eurosystem now owning public and private sector assets amounting to over €2 trillion, we have become a bigger player in the market than ever before. this means that we are now buying bonds from more price - insensitive investors, such as pension funds and 4 / 5 bis central bankers'speeches insurance companies, bidding