certain countries were asked to liberalise capital flows too early. the issue has therefore been very sensitive since then. today, however, most countries agree on the positive effects of free capital flows – that is that they contribute to increased economic growth by enabling resources to be used more efficiently. the issue of free capital flows has now appeared on the imf ’ s agenda once again. the sudden stop in capital flows during the initial phases of the crisis and the subsequent rapid increase in capital inflows into emerging - market economies have focused attention on the problem of volatile capital flows. massive inflows can lead to overheating and asset - price bubbles and as there are no clear guidelines a number of emerging - market economies have chosen to manage massive inflows by introducing a range of capital controls. the member countries have therefore given the fund the task of drawing up guidelines on how countries should manage such capital flows. this work has been underway for the last 12 months and a proposal for a comprehensive framework will be discussed by the imf ’ s executive board at the end of october. according to the proposed guidelines, countries should in the first instance review their fiscal and monetary policies in order to manage or counteract major capital flows, and as a complement to this they should use various macroprudential - policy tools. as a final resort they may introduce capital controls. the idea is that the imf should give advice on how these tools should be designed in order to be effective. no organisation has played a clear role in the liberalisation of capital flows. this is a major difference compared to the liberalisation of trade, where the world trade organisation ( wto ) played and still plays a prominent role. i think it is positive that the issue of capital flows is once again on the imf ’ s agenda as it is an important issue that requires careful analysis as volatile capital can cause serious problems. … as clearly demonstrated by the crisis in our region the need to analyse capital flows became clear in connection with the crisis in our region too. if capital flows had been systematically analysed prior to the crisis, we would have seen that capital flows to the baltic countries were dominated by bank loans from nordic parent banks to their baltic subsidiaries and not, for example, by more sustainable direct investments. perhaps this would have led the alarm bells to ring sooner and louder. in our constituency we have carried out an empirical study of iceland ’ s and the baltic countries ’ experience of capital flows and capital controls before

insurances existed then as now one can also observe another similarity, namely the occurrence of so - called credit insurances. a company that sold credit insurances to the swedish banks in the 1980s and 1990s was svenska kredit. many banks bought insurances against losses from their loans to property companies from this company. when the property market crashed, svenska kredit was unable to meet all of its obligations and consequently went bankrupt. this in turn fuelled the problems for the banks. there are parallels between the swedish credit insurance companies of that time and the current so - called monolines. these are large insurance companies which are specialised in insuring various types of bond loan. those who have bought the companies ’ insurances have traditionally been municipalities, federal states and other bond issuers with poorer credit ratings. the insurance has meant that the bond loans have received better credit ratings and it has been possible to sell them at better rates. in july 2007 the outstanding volume of bonds insured by monolines amounted to a value of usd 3, 300 billion. in recent years these monolines have increasingly been used to insure securities issues with a subprime content. this has meant that they have also begun to experience problems. this risks in turn having repercussions for the securities they have insured and ultimately for those who have invested in them. of course, there are also some essential differences between the most recent financial turbulence and the swedish bank crisis. this applies to both the nature and the scope of the crisis. but, as you will note, there are many and striking similarities in the way people have acted. or as voltaire is supposed to have said " while history may never repeat itself – man always does! ” financial crises arise as a result of imbalances in the balance sheet so why do financial crises arise? the root of most financial crises can quite simply be found in the imbalance between assets and financing. the simplest way to illustrate this is to look at a stylised bank ’ s balance sheet. on the asset side there is lending to companies and households. these are assets that cannot be realised quickly without a substantial discount. in other words, they are illiquid. the bank ’ s financing on the other hand largely consists of deposits from the general public and short - term borrowing on the interbank and securities markets. their financing is thus very liquid. in normal circumstances this is not a problem, as we do not expect all depositors and other