At the same time, one should be aware that market participants may be subject to collective misperceptions of risk. And even if risk is correctly perceived, private responses may not be appropriate from the viewpoint of systemic stability.
Private behaviour can be affected by expectations of official action (moral hazard); by short term horizons induced by the nature of contracts; by differing interests as between principals and agents; and more generally by the combined effect of forces that make for what we commonly term “herd behaviour”. Let me turn, finally, to the role of monetary policy.