 Now let's give the floor to the question which the question directly to raise your question and less comments because we don't have much time. First, yeah. Thank you very much, Tony Addison from WIDA. Given the enormous cost to the Finnish economy, something like 9% gross, clearly poorer countries would find it very difficult to bear that cost. So one implication of your talk and the Nordic crisis be that developing countries, particularly low-income countries, should stick with financial repression and capital controls and a limited banking system for as long as possible. Just second one. Yeah, please. Yes, yes. The development results side, pre-regulation and post-regulation, the way the banks are using finances to develop the economy. Did you see any difference in the two periods, whether the regulation had a significant influence on financing for development results? Have there a third one? Thank you very much. Finta from you and your WIDA. First of all, let me say thank you very much for these two excellent overviews of a very complicated area. I said in my opening remarks yesterday that restructuring of the nation's financial system is now the first and on top of the list of three core issues that Vietnam is facing. So obviously this is extremely relevant. In Denmark, there was a bank and building crisis in 1907-08. It's a little studied crisis, but there are some striking similarities between what we have seen subsequently, 1907-08, 100 years before. Seppo, you mentioned that a fully laissez-faire system may be unstable. I was sort of wondering whether you might want to just elaborate a little bit and relate it to that, the questions of how quick and how gradual do you actually go about doing your business. The situation is that, for example, in the case of Vietnam, there is a clear discussion about how quick and how gradual should you do things. This may be at the very core of whether this ends up being a success or a failure. So I was sort of wondering whether the two of you, and thank you, Raphael, as well, for bringing that number of other dimensions. But I think this is sort of at the very core of the approach that you're now going to take. So I would appreciate it if you would sort of elaborate on that. First around to reply, three minutes, two minutes. And now we can have for the second round question. Sure. Let me, maybe I'll start with Raphael's discussion. There are many points. Let me just take up a couple of points there. One is that you have to often these crises come because of policy, but also market mistakes. I think that is important. I was saying that the risk perceptions for decades with controlled finance systems will, when you liberalize, then you have to somehow educate people. And that was not done. So that's certainly one important. The recent period, that graph was very interesting, in fact. You see, what happened now as part of this 2007 onward crisis for the Nordic countries, we did not have the part from Iceland, which is a different story, but did not have any systemic crisis. There were banking problems in Denmark and also in some Swedish banks, namely those which had gone in a big way to the Baltic countries, which had a major decline in GDP and so forth. So that was not the Iceland is a different story. And let me not get into that, otherwise I'll talk very long about it. But that's quite important to note that. But nevertheless, you are affected by the Nordic countries. The real developments are affected by the fact that much of the Western world or the transatlantic world, I think, has had pretty slow development since. So that, I think, is worth saying there. Then as it comes to the comments or questions from the floor, the first Tony's question about the real GDP of this, they were very high and it was definitely a tough period to find the political consensus that was found there and things worked out out there. I think one lesson from the Nordic ones, really Finland, Norway and Sweden kept the capital controls as long as possible. I think that was a mistake, in fact. The Danish way of, they went much with the Western European. They were closer to the Western, which was a gradual liberalization, various steps going on in a period when things were relatively smooth and not doing it too fast. That, I think, worked on the way. So I think the important thing is to realize that as a country becomes more international, like Nordics at that time, there will be pressures on this tightly controlled financial system. It'll probably start to leak somewhere. I mean, the gray financial intermediation will pick up and so forth, so you have to somehow keep that in mind also. So I think the right policy is not to stay with strict controls as long as you can, but rather reform gradually. Think of an overall strategy to reform and watch out for, because if you try to control tightly, it'll leak probably somewhere and where, of course, that depends on the circumstances, but that, I think, is important. You have to respond to that and start thinking about an overall strategy, and it's not just the steps. You have to plan the macroeconomic framework as well. I think that's quite important. As regards, there was this question about the bank financing before and after the crisis. At that time, of course, the banks in the Nordic countries on the whole were not this multifunction big operation which had standard banking and investment banking as well. The investment arms of these banks were small. I mean, there were some, but they were small there, and so the banking systems were simpler. I think what happened during the crisis, crisis when we were restructuring, there were obviously some, we saw the negative credit growth there, whether in the Nordic countries, during the financial crisis period, is that the demand driven or is that the supply driven? That's always a difficult question. Question, I've actually, with some colleagues, made some studies on the Finnish case, and the evidence is not clear. I mean, even though you try to do the best econometrics on this and with the data, it's not clear. There were clearly, there were some financial constraints on firms, and obviously, but the evidence is not so, obviously the recession also meant the demand for lending or new loans was also going down quite a lot. So the Finnish case, I know, I've seen the studies, and I've done them partly myself. So that evidence is not so clear, but that is obviously a risk. That if things really go bad in the banking system, they could be that you start to get credit constraints on companies, and that will make the recession worse. So that, then there was this broader question about the Danish 2007, 2008 crisis I have to look into. I don't know that experience in any detail. Of course, the crisis where, before World War I, we had financial crisis all sort of, every 10 years or so in several countries, also the major economies, in many of the major economies. But this question about financials, free financial systems and market-based financials, are they unstable? This, of course, is a big controversy in also in academic research in economics. I think these controversy has always existed. There has been this view that the financial system and financial markets are different from other markets, which I certainly believe. I mean, the information problems, et cetera, agency problems, all of these moral hazard adversities, all of these things are very prevalent in financial markets. And whereas, obviously, they do exist in other markets and depends on the type of commodity that's being traded. But in financial markets, they are very prevalent. And certainly my personal view is that, yes, this is a serious concern. And I think this trend towards deregulation and less regulation that existed in the Western economies since about 1980 or so. I mean, that one can even perhaps put Ronald Reagan, Margaret Thatcher as the names there. It actually, in many other parts of the economy, actually it was a good thing. I mean, there was also standard stuff, standard commodities, standard production activities. There was a lot of regulation and doing less of that was very good. But I think in the financial systems, I think this was a wrong trend, I think that we need. But obviously, we also have to remember that financial systems are very difficult to control. New innovations, new kinds of assets, new kinds of derivatives, whatnot are being created. And so you have to be alert to that. The supervisors will have to be alert to that. And so this is a complicated subject. But I certainly believe, and I think that's a fairly common belief view on nowadays is that the current financial crisis is partly created to a large extent by the deregulation and these new forms of financial products which turn out to be problematic. Those are good examples of these problems of model hazard and adverse election and very imperfect information, which are, and then some participants making use of the fact that the other side doesn't understand these things fully. So all of these, I think this idea and Raphael also was alluding to simpler banking. I think that certainly is a view that I share. But how to do it? And obviously this will evolve, keep on evolving. Now, we're now starting to see new, if you regulate banking system very tightly, the shadow banking, as it's nowadays called, not the gray system, but shadow banking will become bigger. And then in principle, the idea, some people have suggested, yeah, let's just keep the shadow banking there and people will face their own ways. But what about if the ordinary banks get into some way into the shadow banking as well and have connections, have a liability there. And if the shadow banking system crashes, that may bring the ordinary banking system, which after all is the basic lending channel and it handles the payment system in many countries. That's really the big thing that you have to make sure that the payment system functions, continues to function. And also that the lending, ordinary lending, the businesses and households continues to function. Let's see if I, I'm gonna try to concentrate in one issue and see if we better can to some extent. Sure. Okay, so let me just mention a few things. You were talking a thing about, I believe it was you about the fiscal cost and the cost of this crisis so you were talking about that, yeah. I didn't say that, it's easy to talk about this in 2014 but the Chilean cost in terms of fiscal terms was close to 40%, that's the official estimation we have today. So at that time, I don't know if people were so happy about what was happening. Today with the perspective of time and not paying anything of that 40%, we kind of feel proud of what we did but I don't know if they were so proud of that time. So it was 40% in Chile, that was a fiscal cost. Even though it was exposed, a successful experience. So I tend to favor the idea of, and again, we're speaking to some extent, this is not very rigorous here, I cannot, I don't have any question to show this but coming from this world and having the perspective and the bias of a financial regulator, I kind of believe that graduality is key. Now, the only concern that I have with graduality with implementing things in a slow way is that of course, when you're moving in the right direction with graduality, it always generates cost to somebody and best interest have more time to block what you're doing. Because no matter what you do, there's somebody who doesn't want you to do that in the economy, right? I mean, this is, so to some extent, at least in the short run, clearly at the individual level, there is a zero sum game, right? So the problem with best interest group, I think, is key and let me just make two comments about that because I think it has to do with the challenges that we're facing in the future. The way Chile has managed to have a success of financial system at the end, exposed, has been having very large, very then strong, very solvent, very profitable banks that are very strictly regulated, so it's an equilibrium between the two parts, banks and regulated, but where they have really high probability, over 20% of returns, with a low probability of crisis and that's fine. With a few qualifications, what happened in that world when things start changing and then you want, as Seppo was saying, innovation of some kind. When it happens, when you need to have some level of entry of revolution, those large, solvent, best interest groups, all they do is to block that and the regulator is a victim of the same goal. So what you think today, and we were talking about this yesterday, about financial inclusion and you think about the possibility of putting the great market in the cloud and having all these young guys who can lend money at a really, really low cost, I don't know, the probability of having a regulator that is going to accept that, sleeping in the 90s zero because of the operational risk. There's always an excuse to block that so that's something that I'm concerned about when you think about the future, given that today we're talking about issues that you didn't talk in Chile when you were at $3,000 per capita country, like consumer protection, like innovation, and so on. And things that are important for Chile today with $20,000 but also important for rich countries given the new technologies. In the sense that we have opportunities and I finish with this, there is this beautiful article in The Economist a few years ago saying that if you want to find smart and fun things happening in the banking sector you need to go to Africa. You're not going to go to the US or Japan because the banks don't allow that to happen. So that's a huge issue I believe that puts some challenges ahead of us, okay. Questions? First, somewhere else? Besides Tony? No. Oh, please. Yeah. I was just struck by the movement of housing prices in Finland and the stability relative to shares and talk about the role of property and property prices a little bit more of the interesting. Are there others? If not, Tony please, the second right. Yes. I really enjoy a financial crisis because it's sort of, this is kind of deep economics. Provided financially I'm not involved with it. One question is the compatibility between central bank targeting of the overall inflation rate and financial stability because what we're generally seeing particularly at the moment is low inflation. That's the classic target for central banks. The very high asset price inflation, typically housing and that obviously can lead to a problem over time so there's the whole issue of macro prudential regulation which now the Bank of England is looking at very seriously because the Bank of England faces a problem which is we have very low consumer price inflation but very high asset price inflation now and asset price inflation is typically the thing that leads to the blow up of the banking system as banks overland. So I'd like a comment from Seppo about the compatibility between inflation targeting as we've conventionally done it for the last 30 years and the stability of the financial system. Secondly, just a brief point on this, I think it's very crucial, the difference between the gross cost of a financial disaster and the net cost because while it's true that 30 years later or 20 years later you can say well the net cost was really quite small. At the time particularly for a poor country it's a big demand on current tax revenue and typically you have to issue public debt to recapitalize the banking system and that's a large opportunity cost in terms of public spending on education and health and all the things that we need for development. So I think we've got to be very careful here about the kind of discount rate we apply to the distribution of the costs because particularly very low income countries in Africa really cannot afford to spend 10% or so of their GDP on dealing with the immediate problem of a financial crisis because of the opportunity cost for public spending and certain development spending even if they come out, the government came out with a profit 20 years later once it sold the recapitalized banks. So thank you. Each have only 1.5 minutes. We must finish on time. Okay, let me respond to this question. First of all the question about the house prices, yeah, I mean that is obviously central here. Typically what you see as the financial problems developed before that you see this boom in real estate, in house prices often in the stock markets as well. And of course what is important is but it's not just the boom itself. You have to also have to look at, is it financed by debt? Real estate very often is financed by fairly high debts as well. The stock market prices, that's a bit more mixed case. In fact, we had the IT boom at the end of 90s. Actually the biggest stock market boom was at the end of 90s. That was an IT boom but I think that was, almost everybody was caught by surprise. So that was lucky for those who held the shares then. And then when it crashed that was cut on your net worth but if it was not based on debt financing then the problem of debt's not going down with the prices when the IT boom crashed was not there. So the stock market booms can be different. Depends on whether the boom gets going so much and is the debt financed there or not. So the IT boom is a counter-example to that. It created a recession but only a mild recession. It could have been, had it been debt financed, heavily debt financed boom, it would have been a big, big, big crisis there. So I think that is, you know, the role of asset prices is very important. Then Tony had these two comments. One is on inflation targeting versus financial stability. This of course is an issue which the central banks are facing and need to somehow deal with. You know, so far the response has been that let's keep the inflation targeting more or less in place but add the macro prudential tools to this to try to ensure financial stability. And those are, as Tony mentioned already, those are being developed. UK is a very good example. Also in the Nordic countries, you know, legislation has already passed or is being done about creating macro prudential tools for usually it's the supervisor who will decide on this, not necessarily the central bank but there's obviously going to be coordination on this. So I think that is an important development. It's a new development. So what are the right sort of levels and so forth is going to be difficult. It's going to be challenging on this. Tony also mentioned this problem about that we have very low consumer price inflation and high asset price increases at the moment. Yeah, that is worrisome development especially if it continues long enough. The problem of course is that the low inflation in commodity prices, I mean there are some various explanation, one is of course that there are things like energy prices and also food prices to some extent have the inflation has been low and they've contributed. The other one of course is the fact that the central banks have had to because of the legacy of the ongoing crisis have to have very low interest rate policies and the banking system depends on the country in question but the banking systems are not particularly strong so starting to raise the interest rates is US is now thinking about it and moving very gradually, Britain is thinking about it, ECB is not yet thinking about it and one big reason is that you have to do it very carefully because of the fact that the financial systems are not necessarily all that strong but this is contributing to some of the problems here. So we certainly have a very challenging time ahead of us and this framework of putting inflation targeting together with financial stability, the details are being worked out and but we have little experience on this so this is a complicated subject where we have to tread carefully and just try to do a good job in central bank there. You write also about the gross versus net cost that it can be very tough for developing countries. Obviously it depends also on the situation what was your situation with public finances before the crisis erupted. Again, I don't know the developing country experience in detail but if you look at Ireland for example, they had very low public debt before the current banking problems and the banking crisis there developed and erupted and they've decided to increase public debt in a big pay. I mean they just went that way. That way, so they had about a little over 20% public GDP debt to GDP ratio before and now it's well over a hundred. It's over a hundred now and that is a very large extent of that is the banking crisis. The gross fiscal cost, it's difficult to estimate. We can only do this afterwards very well but looks like the gross fiscal cost is maybe three times the finished one which was 10% of GDP roughly. They've gone that sort of way. But this is just one of these very nasty and very hard problems that countries which face a crisis, they have to decide what to do with the banking system. Iceland of course is a different case. They bankrupted the banks and started new banks but they still have a lot of old obligations in place and cleaning out the mess that way is not the simple way either, it's complicated. I always try to push the idea that the 2008 crisis was a micro-prudential crisis even though one of the key lessons of the crisis is the need for macro-prudential policies but since you're talking about the real estate prices let me just make the connection and this is one of the lessons that Seppa was mentioning in his talk and I couldn't agree more and let me just tell you from personal experience in Chile in the last two years we basically follow one of these macro-prudential recommendations forcing the three key authorities to meet every month with the president of the central bank the minister of finance and the bank regulator to discuss several issues that are happening in the economy and let me tell you that after two years of meetings that started in 2011, the president of the central bank and the minister of finance were 100% of the time there I mean it's not that they send their junior economists or their friend or whatever, I mean they were there and they had full commitment and one of the things that we devote more time had to do with real estate prices in Chile we have not had a crisis in the real estate market since 1998 and at some point it's gonna happen and the taller you go, the deeper you fall, the stronger you fall, so we're really concerned and the fact that you meet every month and you share information and you have the central bank with the macro-view you have the fiscal part behind and you have the micro-prudential regulator together and having the president of the central bank giving speeches just out of the blue saying, you know what? Last crisis was in 1998, be careful, just that generated a lot of rejection from the construction sector of course but at the same time it made some changes in the market it may be unfair, but it happened and my experience was really positive in that respect so I wanted to mention that. Okay, thank you for the two excellent speakers and also this consent and thank you for your participation in the discussion now is the time for our coffee, thank you.