From Systemic Risk the Clare Distinguished Lecture in Economics and Public Policy by Jean-Claude Trichet, President of the ECB organised by the Clare College, University of Cambridge, Cambridge, 10 December 2009
~~~ ” … However, macroeconomic stability has not been a sufficient condition for financial stability. It cannot eliminated systemic risk altogether. Macroeconomic authorities have therefore been frequently called on to provide remedial action, once booms have turned into busts. The aim of their action has been precisely to avoid the transformation of individual financial risks into systemic risk.
Ex post remedial action has often been activated as soon as the financial firestorm has threatened the stability of the economic system. But such action risks raising expectations that macroeconomic policy will always insure against tail risks, no matter how large. Expectations of this sort can contribute to an under-pricing of financial risk in subsequent phases of the financial cycles. They can encourage concentration of market positions in the financial scene.
At the same time, the instruments of counter-cyclical policy have been used so intensely – and more so from one financial cycle to the next – that authorities might have tested the extremes of their control procedures. I am borrowing here from dynamic control theory. Repeated attempts to fine tune a mechanical or electronic system after a shock sometimes leads to “instrument instability” that makes the system spiral out of manageable bounds.  Economic and financial systems, I suspect could have some structural similarities with physical systems, leading to the same kind of “instrument instability”.
Moral hazard and policy instrument instability pose questions to which we are not in a position to a firm answer at this point in time. I would like to see these questions studied and debated in eminent academic institutions like this….”