A lack of reliable information resulted in excess risk-taking by many, perhaps unknowingly. Investors and banks believed they could pass on losses to others or expected the authorities to intervene in the event of failure. It is now widely recognised that the regulatory framework for financial markets was too weak. Increased ambitions with regard to regulating financial markets and new and better instruments are on the agenda. I will revert to this later. But let me start with the external environment. The world economy: Keeping one’s house in order provides robustness The global economic crisis in autumn 2008 was the biggest economic earthquake in our time. The following year, world GDP fell for the first time in generations. The crisis was triggered by an abrupt decline in the US housing market, but a tightly interwoven financial sector caused the problems to spread rapidly across countries and sectors. When the bubble burst, excessive optimism in the financial sector turned to deep pessimism. The flow of credit dried up. It became expensive and difficult for financial institutions to procure funding even though the problems had originated in asset value losses in a faraway region. Cross-border trade, which is dependent on well functioning credit channels, was adversely affected. Even an expansionary economic policy, with record-low interest rates, low tax receipts and strong growth in public demand for goods and services, could not prevent the downturn from deepening in many countries. However, it did help reduce its duration compared with the depression in the 1930s. Chart 1: Current account.

This will provide a clear division of responsibility. Could the discussion about new banking sector regulation be a case of the pendulum swinging back towards the regulatory optimism that I described earlier? The picture is probably more nuanced. The banks have shown a striking ability to adapt, a skill which they hardly intend to relinquish. It must be acknowledged that no regulation can prevent financial institutions from encountering difficulties. A new regulatory framework must therefore ensure that banks have the ultimate responsibility for the risk undertaken. Regulatory compliance will then also be in their own interest. Conclusion In my address this evening, I have sought to gather together some historical threads relating to the design of economic policy through our recent history and at the same time provide some glimpses of developments in the field of economics. Views on macroeconomic management have changed in this period – influenced by economic developments and events. Perhaps the policy response during the financial crisis also reflected a swing of the pendulum towards increased regulatory optimism. On the other hand, the financial crisis required full deployment of instruments. Measures were far-going and some were unconventional. In some countries, the bill to be paid is substantial. In their prize-winning work, Kydland and Prescott raised the question of discretion versus policy rules. Today, we have perhaps opted for “both, please”. An economic policy that is conducted blindly according to a rule, or only oriented towards solving day-to-day problems, can have adverse effects.