Prof. Dr. Mario Draghi at the IX. Ludwig-Erhard-Lecture in Berlin, Germany - 12/15/2011.
Q: I'm going to ask my question in German: My name ist Ralph Bärligea and I'm the chairman of the"Hayek Circle" at the University of Passau. We all know that the financial crisis was mainly caused by central banks due to too low interest rates - the mortgage crisis in the US but the sovereign debt crisis was caused by too low interest rates as well, by the the fact that the ECB accepted the deposition of government bonds and by granting loans to banks without demanding any equity capital as collateral. How would you as a representative of a central bank assess the idea of the abolition of the monopoly on money creation and the support of a development towards a market-based monetary system in which every investor is liable for his own decisions? When you as a lender of last resort grant loans, you are in fact also making an investment but there's no investor who is liable for this kind of investments. In addition to that, it is questionable in my opinion that you as a central instance can possess the same amount of knowledge as many decentralized investors.
A: Let me say just one thing about the crisis: I think the monetary policy was one circumstantial additional element to creating an environment where a crisis could actually erupt as it finally eventually did.
But I think that real root of the crisis has to be found in the several serious regulatory flaws in one financial jurisdiction. I think these regulatory jurisdiction flaws are not a one of event. It had been flaws, it had been created throughout several years starting more or less with 2000/2002/2003 onward until the crisis. And this environment has created a situation where you had assets which were impossible to price correctly because they were opaque. You had a weakening of the regulatory controls of all kinds - without going into too much detail. And around this you had an abundance of liquidity coming from monetary policy, but also coming from what was called the savings glut. In other words: money flowing into the capital markets from the Asian countries and other emerging market countries. And so again we had a situation which is in a sense similar to what I have described before for government bonds. We had risk premia that were not reflecting the inner riskiness of the assets. In this environment you also had excessive and misperceived leverage - that is to say: debt. In this environment of lacking transparency, very low interests rates, perverse incentives into action, you also had, you obviously had the actors raising too much debt and not even understanding how high was there debt often, because it was concealed by the very opacity of the instruments they were using to raise money. So, that's to give a overall fair picture of the background of which the crisis had erupted.
But, the next step is to say how would be a world without central banks? I don't know. Frankly, you see, that's one of the things which one like me should ask. Because we tend to, sort of, work so much into our own nest that we often avoid the big questions like: How would the world be if I didn't exist? And I promise I'll reflect on this!