ultimately helped to preserve the vast majority of private sector jobs. to the extent that businesses are successful in stabilizing and eventually boosting profits and cash flow, capital spending should begin to recover more noticeably. such success would likely be accompanied by a decline in elevated risk premiums back to more normal levels and, with real rates of return on high - tech equipment still attractive, should provide an additional spur to new investment. when capital spending eventually recovers, its growth is likely to be less frenetic than that which characterized 1999 and early 2000, when outlays were boosted by the dislocations of y2k and the extraordinarily low cost of capital faced by many firms. still, the evidence strongly suggests that new technologies will present ample opportunities to earn enhanced rates of return. indeed, anecdotal reports from businesses around the country suggest that the exploitation of available networking and other information technologies was only partially completed when the cyclical retrenchment of the past year began. many business managers are still of the view, according to a recent survey of purchasing managers, that less than half of currently available new, and presumably profitable, supply chain technologies have been put into use. while these opportunities remain abundant, they will now play out against the backdrop of a major uncertainty that we all must deal with these days - - the specter of further terrorist incidents on american soil. it simply is not possible to predict whether there will be any such incidents or to forecast their possible consequences for the economy. but we can have little doubt that the tragic events of september 11 have left obvious marks on the economy that will not soon fade even though some of the initial impact of the shock has receded. importantly, as i suggested shortly after the event, adjustments to new levels of perceived risk will cause a one - time downward shift in the level of productivity. clearly, businesses will be less comfortable now than they were before september 11 in allowing inventories to shrink to minimal levels in a just - in - time supply chain. moreover, in some industries, resources will need to be diverted from efficiency - enhancing capital investment to providing security and contingency backup. fragmentary data for the months following september 11, however, indicate output per hour is holding up well. temporary labor - shedding may have overwhelmed the effects of added security and redundancy. it is not yet clear whether the negative shock to output per hour from the heightened risks is small, or just delayed. in any

banks ’ business models from “ originate and hold ” to “ originate, repackage and sell ” also had significant implications for financial stability. securitisation was meant to disperse credit risk to those who are better able and more willing to bear it. but, as the current crisis has shown, this did not work out as envisaged. this stems from the fact that the same instruments that are used to hedge risks also have the potential to undermine financial stability – by facilitating the leveraging of risk, for example. moreover, there were major flaws in the actual interaction among the different players involved in the securitisation process. these included misaligned incentives along the securitisation chain, a lack of transparency with regard to the underlying risks of the securitisation business, and the poor management of those risks. there was a dramatic increase in the complexity of securitised products prior to the crisis, owing largely to misaligned incentives and investors ’ search for yield, which, in particular, made the valuation and risk assessment of these products extremely complex and difficult. chart 3 : securitisation issuance in europe ( in eur billions ) source : european securitisation forum. in contrast, the covered bond market has been more sheltered from these incentive problems than securitisation markets, partly because traditional covered bonds have a simpler structure. this makes the overall market more transparent, and the valuation and risk assessment easier. covered bonds also have a much stricter regulatory framework. overall, there have been problems in the securitisation market that relate to opacity and misaligned incentives, which – looking ahead – need to be addressed by market participants and regulators in order to restore the securitisation market to health. money market problems as a symptom having gone through some of the major factors that have affected the condition of banks during the current crisis, i will conclude by recalling not only the exceptional speed with which the crisis hit the financial sector, but also the unprecedented size of its impact. consider, for example, interbank markets. in normal times, interbank markets are among the most liquid in the financial sector. in 2006 the daily turnover in euro area money markets was €140 billion. 8 the sudden seizing up of interbank markets and subsequent failure to redistribute liquidity ecb ( 2008 ), euro money market survey. has become very much a key feature of the financial crisis. 9 chart