stefan ingves : introduction on monetary policy speech by mr stefan ingves, governor of the sveriges riksbank, to the riksdag committee on finance, stockholm, 11 november 2010. * * * it is always a pleasure to come here and meet the committee on finance. and it is a particular pleasure to see many new faces. i had the same experience four years ago when i had been governor of the riksbank for less than a year. it is particularly inspiring to have the opportunity to discuss monetary policy with new representatives of our employer, the riksdag ( swedish parliament ) – and it is, of course, as always interesting to discuss it with the ones i have met before. just as i did four years ago, i will begin with a summary of the situation. so where do sweden and other countries stand today, and how did we get there? i intend to give a fairly rough outline of my own view of the situation, without going into too many details. this is usually the best way of conveying the essential features. it will also make it easier to put current monetary policy in the right perspective. several explanations for the crisis the past couple of years have been rather dramatic, since the financial market turmoil erupted into an acute global crisis in autumn 2008. it will probably take some time before we have the complete picture of why the crisis arose and how it could become so deep. but there are a number of circumstances that almost certainly contributed, although there is still debate on their relative significance. poorly adjusted regulations and insufficient oversight one fact that definitely did play a role is that the regulations and supervision did not function satisfactorily. one of the problems was that there was too much focus on the situation of individual agents and too little focus on the financial system as a whole – too much micro and too little macro, if you like. moreover, the supervision lacked the necessary international oversight as it was largely conducted on a domestic basis by each individual country. there were also loopholes in the regulations that, for instance, meant that some institutions and markets were not covered and could expand without the authorities having any real oversight. things were not made easier by the fact that there was also great ingenuity in the financial markets that resulted in new financial instruments, where no one properly understood the risks. so all in all, one can say that the deficiencies in regulation and supervision meant that the brakes did not catch when events got out of control and

actually conducted. in the united states, for example, there was justified concern that the country might suffer the same deflation problems as japan, and many other countries also perceived the threat of deflation as something to be taken very seriously. … as a result of a global savings glut? but there was also another and probably more important factor contributing to the low interest rates. since the end of the 1990s the emerging economies in asia, particularly china, and in the middle east had experienced large current account surpluses, particularly in relation to the united states, but also to other western countries. in other words, the countries with surpluses had exported many more goods than they had imported. in return, they had invested the surpluses in bonds and other assets in the countries with deficits. one could say that this reflected an increased willingness to save in the world economy – a global savings glut. this surplus contributed to pushing down long - term interest rates in the world. at the same time, there was a lot of capital to invest in the countries with deficits. a large share of this found its way into the property markets, where prices soared. it is not unusual for such international imbalances to lead to problems sooner or later. the situation is reminiscent of that which arose following the oil crises in the 1970s. the large increases in oil prices then meant that the oil - producing countries were sitting on huge amounts of dollars, the currency in which oil is normally traded. these so - called oil dollars, or petrodollars, were channelled through banks in the west into loans to countries in, above all, latin america. however, it was gradually revealed that the loans had been granted on overly optimistic grounds, and many countries found it increasingly difficult to pay the interest on their debts. this led to the debt crisis at the beginning of the 1980s. we thus now have a similar problem with global imbalances in the form of large current account surpluses in some countries and deficits in others. the difference today is that the surplus this time has contributed to excessive borrowing in many western countries rather than to a debt crisis in latin america. but the theme remains largely the same : plenty of money to lend, excessive optimism among lenders and borrowers and inadequate controls and supervision – this is usually a sure recipe for a crisis. global challenges so much for the causes of the financial crisis. what about its consequences? one obvious consequence has been that many countries have needed