lars nyberg : the crisis, the riksbank and monetary policy speech by mr lars nyberg, deputy governor of the sveriges riksbank, at the bankmarknadsdagen, stockholm, 28 november 2008. * * * introduction the financial system is an important part of our social structure. the payment system and the supply of credit are central to all economic activities. when the general public ’ s confidence in the financial system is shaken and when the participants in the system no longer trust one another, then something serious has happened in our society. this means that all those involved, both in the private and public sectors, must have a discussion on how this situation arose and what we can do to avoid it happening again. the financial turbulence, which began in summer 2007 with problems in the us mortgage market, has during the autumn become an acute crisis. also during the autumn we in sweden have gone from largely watching the crisis from the sidelines, to being very much involved. today i will give my views on how this could happen and on what has occurred during the autumn. last spring there were many indications that conditions in the financial markets were gradually improving. i shall also reflect on the methods used by central banks and governments around the world to try to manage the problems and to safeguard financial stability. it would take too long in this context to analyse what conclusions should be drawn for the future, and it is probably too early to do so yet, but i shall nevertheless share my impressions this far. in conclusion, i shall discuss how monetary policy can complement the more acute financial measures taken, and alleviate the effects of the financial crisis on the real economy. acute financial crisis … the turn for the worse can be clearly dated to the middle of september when us investment bank lehman brothers was forced to file for bankruptcy protection. money market participants had not expected such a prominent bank to default. when the bank nevertheless defaulted, fears grew that more participants risked the same fate. this was when the confidence crisis broke out in earnest. no one dared to lend money to anyone else because of fears that the other party could become insolvent and the money that had been lent would disappear. investors preferred to put their money in government securities. one result was that interbank lending around the world more or less ceased. the difficulties the banks had experienced earlier with financing at longer maturities were intensified. the banks ’ borrowing costs increased further and companies outside of the financial sector also experienced financing difficulties. at the

; new technology replaces outmoded practices and the labour required for each unit of capital equipment decreases. unprofitable units or firms are closed and new facilities are established. productivity rises in the economy as a whole. high productivity growth makes it possible to maintain business profits and keep price increases down. the transformation process generates a positive spiral ; the introduction of the new technology results in widespread rationalisation and greater efficiency. the resultant increase in the trend rate of growth for a longer or shorter period means that the economy can expand more rapidly than before without boosting inflation. this is the process that is often being referred to today as “ the new economy ”. i do not find the term particularly apt but if it can serve as a simple aid to understanding what the new information technology can bring about, i have no objection to using it here. a similar economic transformation is not yet discernible in sweden nor, for that matter, in other countries in europe. so the growth path has not been adjusted upwards as it has in the united states. the rate of investment both in europe as a whole and in sweden has been appreciably lower than in the united states for the past four to six years. it may be asked why the new technology is being introduced so quickly on the other side of the atlantic and so much more slowly here. first i should say that this is a very knotty question. economics has no precise methods that tell us when a technical breakthrough is likely to show up in higher economic growth. basically, however, the process is bound up with the growth climate in general. there is no exact definition of the growth climate but it does include the degree of macroeconomic stability, how the education system performs, the construction of the tax system, the legal framework and so on. so there are numerous factors to consider. it is also important to realise that adjustments to the new technology do not occur automatically. the new facilities will not necessarily be utilised in such a way that the effects suddenly show up in general economic development. a proper transformation presupposes that the right driving forces are in place and that other important requirements have already been met. otherwise the so - called new economy may mean difficulties rather than opportunities. a lack of adaptability can result instead in the economy being weaker and more susceptible to inflation. in other words, if the global economy faces sweden with stronger international competition and demands for change and the necessary renewal of the capital stock and production facilities does not happen,