I have six proposals: 1- First, we need to encourage players to take risks, but only the “good” risks; in other words we need to restore and repair the mechanisms for supplying credit to the economy, and use the full range of tools at our disposal to achieve this. We must stop trying to draw a line between banking and market activities; we need both, because they complement each other. If banks stop all trading activities, liquidity could evaporate from the debt markets. Similarly, Europe needs to create a healthy securitisation market which eliminates the errors of the past. This is the best way to separate lending from sovereign and bank risks, and revive cross-border transactions within the euro area, putting an end to the fragmentation of the financial and monetary markets. 2- Second, we need to eliminate the uncertainty created by public policies, which is a major obstacle to long-term investment. We are currently in a phase of transition following the crisis, but are also experiencing an even deeper transformation in our structures of production, notably in energy. It is vital that public policies are clear, stable, free of contingencies, and unequivocally long-term in perspective. 3- Third, we need to restore our fiscal credibility; this is the only thing that will enable us to withstand future shocks. Major progress has been made over the last few years. It would be a shame to undermine that now. 4- Fourth, we need to recreate what Keynes called “opportunities to invest”.
Too often, markets are constrained by obstacles, regulations and bans which act as a disincentive for investment. If we are going to apply a Keynesian economic model, then we need to apply it to the full, and avoid distorting his thinking. Structural reform doesn’t have to be painful; on the contrary, it often creates a brighter future, and opens up opportunities to those who have none. 5- Fifth, we need to incorporate the structural changes in the financial sector into our prudential oversight. We need to adapt to a new environment where asset managers play the dominant role in capital allocation and asset price formation. This means changing the way we think, as well as our methods of analysis and action. In this context, the French model of integrated supervision is particularly apt. 6- Lastly, number six, we need to refocus financial innovation on the long-term. Today, literally billions of dollars are spent finding ways to shave a few nanoseconds off arbitrage transactions between two trading platforms. At the same time, investors struggle to find secure long-term financing tools for public infrastructure, even though experience has shown that the private (and social) returns of this type of investment are much higher. “Infrastructure bonds” have been shown to offer return/risk ratios that are often higher than those on traditional assets. The G20 has rightly made this issue a priority and is looking for ways to strike a better balance between incentives and initiatives, through regulation and financial engineering. BIS central bankers’ speeches  3