It is an advantage if fiscal policy can also be used to counter fluctuations in demand 9  BIS Review 105/2000  and production. In this way fiscal policy can contribute to ensuring stable operating parameters for the exposed sector. When fiscal policy is given responsibility for stabilisation policy, the government and the Storting have a firmer basis for their annual budget decisions. The political authorities also place emphasis on the fact that by using the fiscal budget to stabilise economic growth, they are able to dampen fluctuations in short-term interest rates. This is important because, for instance, dwellings are to a large extent financed through short-rate loans, and many Norwegians have owner-occupied dwellings. It is the political authorities, ie the government and the Storting, which formulate the guidelines for monetary policy in Norway. The Norges Bank Act also states that the King makes decisions regarding the exchange rate arrangement for the krone. The Exchange Rate Regulation is based on this provision. The actual conduct of monetary policy is the responsibility of Norges Bank. The Bank has explained its interpretation of the Exchange Rate Regulation, and the Bank’s Executive Board makes decisions concerning the use of monetary policy instruments. Executive and advisory authority is invested in Norges Bank’s Executive Board, which consist of the Central Bank Governor, the Deputy Central Bank Governor, and five external members appointed by the government. As in Australia, it is thus a body consisting partly of external members which makes decisions on interest rates.

Independent central banks appeared to have tamed inflation once and for all. New sophisticated financial instruments seemingly succeeded in reducing risks to low levels for ever. A new generation of investors emerged and took on risks that they could not afford. Cross-border transactions increased rapidly at unprecedented levels. After a period of several good years, euphoria emerged at the beginning of the 21st century. The focus on return on equity (short-term) rather than on return on assets (long-term) provided wrong incentives for the owners and the managers of banks. Whereas in 1998 the detaining period for shares in a bank was three years on average in the US and in the UK, it decreased to 3 months in 2008, signalling the so-called “casino capitalism”. At the same time, while in 1989 the executive directors of the top seven US banks gained 100 times the average income of a median household, by 2007, they earned 500 times that income. This disregard for risk sparked worries among the national and international authorities concerning potential threats to macroeconomic and financial stability. The interest in macroprudential policies, which nowadays are seen as vital, became manifest early in the `80s. However, policy implementation remained feeble and the unthinkable happened. Now the most important mission is to correctly identify what went wrong and what principles we should use when making enhancements to our financial system. Before moving on to the next section which addresses these issues, let me draw two lessons. First, overregulation is not good.