customers'deposits the government is prepared to guarantee. the legislation must also cover more than just the banks – other institutions that receive deposits from the general public must also be under supervision. as i said, deregulation was necessary – it was rather the incapacity of the banks and the supervisory authorities to manage a competitive situation that contributed to the crisis. however, the economic policy conducted also contributed. monetary and fiscal policy were not used to slow down developments at the end of the 1980s, which laid the foundations not only for increased borrowing, but also for the currency crisis. the combination of a fixed exchange rate and large budget deficit was devastating. incentives for increased saving were not actually introduced until the crisis was actually upon us and then they only helped reinforce the decline. it may seem something of a paradox that international organisations, such as the basel committee, are now implementing a number of new regulations – such as basel ii – despite the fact that the old regulations had negative effects and were therefore abolished. however, these are a completely different type of regulation. the old regulations were aimed at prohibition and other strict controls, while modern regulations give the banks plenty of flexibility to offer their services as long as they meet certain fundamental conditions. for instance, basel ii allows the banks to determine their own risktaking to a great extent, as long as they have adequate risk management and capital reserves. the experiences of regulation and the crisis also show clearly how important it is that the central bank can make independent decisions regarding the interest rate according to objectives set by parliament, for instance, to maintain inflation or the exchange rate at a stable level. if there are no guidelines for the interest rate, or if the parties that determine the interest rate have differing interests, it will often be set too low for the purpose of benefiting borrowers, investment and central government consumption. this was the case in sweden during the years of regulation. apart from leading to higher inflation and pressure on the exchange rate, exaggeratedly low interest rates also have a negative effect on the financial sector. if the real interest rate is low, even bad investments appear to be profitable and the banks'credit assessment process will not function properly. a large number of borrowers will then experience unsatisfactory profitability, particularly if the interest rate then increases slightly, and will be unable to pay their loans. the bad experiences from the time before and during the crisis led to the riksbank later being given a very independent role to determine the key interest rate within

our efforts to support the economy have gone well beyond conventional monetary policy, however. i have already alluded to the federal reserve ’ s close cooperation with the treasury, the federal deposit insurance corporation ( fdic ), and other domestic and foreign authorities in a concerted and ultimately successful effort to stabilize the global banking system, which verged on collapse following the extraordinary events of september and october 2008. we subsequently took strong measures, independently or in conjunction with other agencies, to help normalize key financial institutions and credit markets disrupted by the crisis. among these were the money market mutual fund industry, in which large numbers of american households, businesses, and municipalities make short - term investments ; and the commercial paper market, which many firms tap to finance their day - today operations. we also established and subsequently expanded special arrangements with other central banks to provide dollars to global funding markets, as we found that disruptions in dollar - based markets abroad were spilling over to our own markets. more recently, we have played an important part in helping to re - start the markets for assetbacked securities that finance auto loans, credit card loans, small business loans, student loans, loans to finance commercial real estate, and other types of credit. by working to revive these markets, which allow banks to tap the broader securities markets to finance their lending, we have helped banks make room on their balance sheets for new credit to households and businesses. in addition, we have supported the overall functioning of private credit markets and helped to lower interest rates on bonds, mortgages, and other loans by purchasing unprecedented volumes of mortgage - related securities and treasury debt. in all of these efforts, our objective has not been to support specific financial institutions or markets for their own sake. rather, recognizing that a healthy economy requires wellfunctioning financial markets, we have moved always with the single aim of promoting economic recovery and economic opportunity. in that respect, our means and goals have been fully consistent with the traditional functions of a central bank and with the mandate given to the federal reserve by the congress to promote price stability and maximum employment. in addition to easing monetary policy and acting to stabilize financial markets, we have worked in our role as a bank supervisor to encourage bank lending. in november 2008 we joined with other banking regulators to urge banks to continue lending to creditworthy borrowers – to the benefit of both the economy and the banks – and we have recently provided guidelines to banks for working constructively with troubled commercial real estate loans. 4 this