16  “The extra-action strategy responds to a perceived speculative boom with tighter monetary policy - and thus lower output and inflation in the near term - with the expectation of significantly mitigating the potential fallout from a possible future bursting of the bubble. Thus, the strategy seeks to trade off the near-certainty of worse macroeconomic performance today for the chance of disproportionally better performance in the future, on the theory that the repercussions of a major market correction could be highly nonlinear. But the extra-action proposal is by no means a bold call for central banks to prick market bubbles.” - Kohn D. “Monetary Policy and Asset Prices” at “Monetary Policy: A Journey from Theory to Practice - An ECB Colloquium held in honor of Otmar Issing”, 16 March 2006. 17  “Interest rate setting must also be assessed in the light of developments in property prices and credit. Wide fluctuations in these variables may in turn constitute a source of instability in demand and output in the somewhat longer run.” – Norgesbank, Inflation Report, March 2006. 18  Trichet J.C. “Asset price bubbles and monetary policy” Speech of the President of the ECB, Mas lecture, Singapore, 8 June 2005. 19  Fukui T. “New Framework for the Conduct of Monetary Policy: Toward Achieving Sustainable Economic Growth with Price Stability”, Summary of a Speech Given by Toshihiko Fukui, Governor of the Bank of Japan, to the Japan Chamber of Commerce and Industry in Tokyo on 16 March 2006.
The development of securitisation has spurred the demand for new types of instruments. This demand led the financial system to generate new assets even at the cost of extending credit to ever riskier sub-prime borrowers. This, for a time, helped sustain a rapid increase of real estate prices which in turn stimulated the growth of mortgages. BIS Review 76/2010  1  The main causes of the crisis therefore lie in the growing “real” imbalances and the uncontrolled development of financial innovations. Overall, these combined evolutions led to a generalized increase in leverage and financial fragility. Against this background, it is quite unlikely that too accommodative monetary policies played a central role in the crisis. Some analysts have pointed out to what they see as an “asymmetric response” by monetary authorities to asset price increases: Central Banks would not lean against asset price bubbles, but were prepared to clean the consequences after they burst. However, we need to ask ourselves whether the unusually rapid credit growth in the years preceding the crisis should not rather have called for complementary policy actions on the supervision side. Some attempts were made in the Eurosystem. In particular, the Bank of Spain enforced dynamic provisioning to curb domestic credit expansion. But the crisis hit globally nevertheless and it raises several challenges for authorities in charge of macroeconomic policies. II –Managing the crisis Starting in august 2007, Central Banks were confronted with major and unprecedented tensions. Increasing uncertainty led to liquidity hoarding by financial institutions.