For instance, in our Financial Stability Report we analyse the financial situation of the household sector and describe our assessment of the situation and potential risks with regard to house prices and indebtedness. The way that monetary policy should manage risks linked to credit booms and rapidly-rising house prices is a difficult problem that will continue to be debated among central banks and in academia. We do not have a perfect solution to this problem. But I nevertheless think that it is a good example of how the Riksbank really tries to find practically-applicable ways of managing difficult challenges. And these must be managed, sooner or later. ...and of course – the financial crisis I hardly need to say that the most dramatic thing that has happened during my period in office here is the global financial crisis. It is partly connected to the problems with house  BIS Review 155/2008  5  prices and indebtedness that I have just mentioned. The crisis is to a large degree a case of an imbalance – of excessive risks in lending and purely structural problems regarding supervision and insight. After just over a year the crisis entered its most intensive phase in mid-September, in connection with the US investment bank Lehman Brothers suffering acute problems. Since then the Swedish financial system has been increasingly affected. The Riksbank and other authorities have taken extensive measures to counteract the effects of the crisis. These measures are still a necessary condition for maintaining satisfactory stability in the Swedish financial system.

Governments and parliaments, as guardians of the public’s trust, have the necessary legitimacy to set the 1  Mark Carney (2015), Breaking the tragedy of the horizon – climate change and financial stability, speech at Lloyd’s of London, London. Available at: https://www.bis.org/review/r151009a.pdf. 2  Real Instituto Elcano (2019), Los españoles ante el cambio climático. Apoyo ciudadano a los elementos, instrumentos y procesos de una Ley de Cambio Climático y Transición Energética. Available at: http://www.realinstitutoelcano.org/wps/wcm/connect/1c5a8ff2-2533-44bf-b2d6-a0c8053b231a/Informe-Espanolesante-cambio-climatico-sept-2019.pdf?MOD=AJPERES&CACHEID=1c5a8ff2-2533-44bf-b2d6-a0c8053b231a. 3 Real Instituto Elcano (2019), Los españoles ante el cambio climático. Apoyo ciudadano a los elementos, instrumentos y procesos de una Ley de Cambio Climático y Transición Energética. Available at: http://www.realinstitutoelcano.org/wps/wcm/connect/1c5a8ff2-2533-44bf-b2d6-a0c8053b231a/Informe-Espanolesante-cambio-climatico-sept-2019.pdf?MOD=AJPERES&CACHEID=1c5a8ff2-2533-44bf-b2d6-a0c8053b231a. 1  path for this transformation process. And, moreover, they have the most appropriate instruments to make it happen. Specifically, within the ambit of public policy, fiscal policy can and should play a leading role in the management of the transition to a more sustainable economy. Indeed, from the standpoint of economic theory, the origin of the problems associated with climate change is clear: economic agents pursue their activity taking into account only their private benefit or cost, while ignoring the social cost (in this case, environmental) that they generate. As a result, the emission into the atmosphere of greenhouse gases exceeds the socially optimal level. This is what is known in the economic system as a negative externality which needs to be internalised.