At the same time, complex financial products flourished, with investors on the hunt for ever higher yields in the presence of robust economic growth, low inflation, low interest rates, low default risk and ample liquidity worldwide. In particular, the expectation that this favourable environment would continue for some time prompted investors to systematically underprice risks in their search for yields.
Thus, instead of contributing to better risk diversification, these new financial instruments simply disguised those risks. We were aware of these imbalances. There was no shortage of early warnings. As long ago as 2005 the ECB warned of the excessive growth of credit. There were also warnings on the other side of the Atlantic that the US economy was skating on thin ice.