- - - 5. 0 6. 0 3. 5 2. 5 trend in order to justify an upward shift in the p / e ratio from just under 15 to between 30 and 35, the expected real return has to be lower and / or expected earnings growth needs to be higher. a p / e ratio at the current level can be explained if, for example : the picture in sweden is somewhat different, with signs of a strengthening of the earnings trend in the period 1982 - 99, though this is not visible in the figure. the krona ’ s depreciation after 1992 seems to have been the main factor here. earnings per share showed little, if any, improvement from 1982 to 1990. however, cyclical fluctuations and changes connected with the krona ’ s marked depreciation should not be central issues for our discussion here. as the stock market trend in both the shorter and the longer term has been largely the same in the united states and sweden and the p / e ratio in both cases is between 30 and 35, there are grounds for assuming that the earnings trend has also been at least approximately the same. see gordon, m j ( 1962 ), the investment, financing and valuation of the corporation, homewood ( irwin ). the simple model is written p / e = d / ( k - g ), where p is the share price, e earnings per share, d the percentage dividend, k the expected return and g the expected dividend growth. – the expected real return has fallen from 6 % to 4 %, or – the expected real earnings trend has risen from 2. 5 % to 4. 5 % a year, or – a fall in the expected real return from 6 % to 5 % has been accompanied by an acceleration of expected earnings growth from 2. 5 % to 3. 5 %. has the expected stock market return fallen? let us begin with the possibility of a lower expected return. does it seem likely? for a long period the expected return, in the united states as well as in sweden, has been stable at around 6 %. so why should things have suddenly changed in recent years in a way that dramatically alters conditions for the long - term valuation of share prices? moreover, a lower expected return would mean that the real return on shares is much the same as on treasury bonds, for example. why would share investment be perceived as having roughly the same risk as investment in bonds issued by a sovereign? but there are

stefan ingves : basel iii – much - needed regulations for a safer banking sector speech by mr stefan ingves, governor of the sveriges riksbank, at the swedish society of financial analysts, stockholm, 1 february 2011. * * * more than two years have passed since the collapse of the major us bank lehman brothers triggered panic on the global financial markets and we were close to a widespread financial meltdown. we will never know what would have happened if the authorities had prevented lehman brothers from going bankrupt. we do know, however, that financial turbulence spread like wildfire throughout the world. market agents lost confidence in each other and liquidity on the funding market was severely impaired. many banks therefore found it difficult to fund their operations and suffered an acute liquidity shortage. in order to stabilise the situation on the financial markets, governments and central banks around the world were forced to take exceptional measures. by offering loans on favourable terms, providing capital injections and setting exceptionally low policy rates, they managed to prevent a total collapse. but this has not been free, and it is not over yet. to date, the federal reserve and the european central bank have lent millions of dollars and euros to the banking system to stop the crisis. in addition to this there have been a great number of national rescue measures. these have largely been funded by governments borrowing money. in this way, debts in the financial system have been converted into centralgovernment debts. for some countries, not least ireland, the debt mountain has grown to unmanageable heights and the financial crisis has changed form to become a sovereign debt crisis. sweden has also been affected by the financial crisis. but, unlike many other countries, we have emerged from the crisis in fairly good shape. growth in the swedish economy is back to pre - crisis levels and other indicators, such as the level of investment and household consumption, are also positive. i would say that this is mainly due to two factors. first, the swedish banks, with the crisis of the 1990s fresh in their minds, have been less risk - inclined than many international banks, although of course with the exception of their operations in the baltic countries. second, the unusually sound condition of the swedish economy has made it possible for swedish authorities to take extraordinary measures without putting our public finances at risk. however, even if sweden has coped relatively well with the crisis this time, we should remember that as a small, open economy sweden is highly dependent on what