caused japan ’ s current economic problems. likewise, while the stock market crash of 1929 was destabilising, most analysts attribute the great depression to the ensuing failures of policy. most things indicate that when banks run into trouble on account of financial turbulence, the supply of credit may dry up and the payment system cease to function. it is under such circumstances that output and employment have tended to suffer severely, leading to actual deflation. that, of course, is what prompted the swedish political system ’ s resolute intervention at the time of the bank crisis here about a decade ago. it was a matter, not of protecting the banks as such or their owners from losses, but of safeguarding the banks ’ central function in our economy. maintaining a modern market economy would be virtually impossible / without an efficient credit supply and payment system. in the present context it is positive that the banking sector is functioning well even though stock markets around the world have fallen steeply in recent years. there are also many signs that the banking sector has learnt a good deal from the financial problems in the last few decades. as regards general economic policy, we know that focusing on low and stable inflation creates a better and securer environment for economic policy decisions on the whole. a credible long - term commitment to low inflation does away with some of the uncertainty about future income streams, which are what ultimately determine the fundamental value of various kinds of asset. such a commitment should also provide better conditions for financial decisions. but there is more to it than that. as representatives of the austrian school pointed out, business cycles are not exactly alike. as a result of exaggerated euphoria, a basis for risks that may lead to future instability can be created even before the threat of inflation becomes more visible. in the event of rapidly rising asset prices, with the associated risk of financial instability, a central bank should therefore keep a watchful eye on credit expansion in the economy. under such circumstances the central bank may need to intervene in the interests of financial stability. in my opinion, interest rate adjustments should certainly not be ruled out if they are judged to be effective. in other contexts i have mentioned the desirability of such a “ flexible inflation targeting policy ” and believe that support for action of this type is to be found in current legislation. the recent share price bubble was not accompanied by any undue expansion of credit. this was no doubt partly because the swedish bank crisis is still so fresh in people ’ s minds and banks

60s came mainly from the rationalisation of existing firms rather than from new enterprises. when the deregulation of trade and of markets for goods and services got under way again in the decades after world war two, attention was naturally drawn to the financial barriers that the tight regulations had set up against future growth. an awareness of the need for new, expanding companies and the emergence of new markets made it natural to promote this with a freer financial system. while this financial deregulation was probably both natural and necessary, it also meant that the world economy again became vulnerable to the kind of exaggerated optimism, with the attendant risk of pronounced financial cycles, that had characterised the late 19th and early 20th centuries. meanwhile, the institutions connected with the financial system had lagged behind. by “ institutions ” i mean everything in and around the financial system that affects its development. examples are sets of rules, the banking system as such, the general public, the political system, the authorities and the media. the shortcomings took various forms. important rules were wrongly formulated or non - existent. the banking system lacked the necessary know - how for risk management, both for its own institutions and for its clients. people had become used to credit being rationed and were now suddenly able to borrow large amounts. the political system, the authorities and professional economists all stressed the advantages of deregulating the financial system but were less clear about the risks. in their struggle for readers, listeners or viewers, the media sometimes forgot to question and scrutinise important elements of what was happening. think how much advice about share transactions has been passed on airily in recent years without a careful scrutiny. in the early 20th century these financial cycles and the risks of major crises were given a lot of thought by economists, not least those of the austrian school. they pointed to the existence of transitory risks in the process of adjusting to a higher rate of productivity growth in connection with technological breakthroughs. at first there is a good circle : rising productivity tends to pull share prices up, making it easier to finance new investments. new investments and a growing capital stock lead through capital deepening to even higher productivity growth. when productivity goes on rising, however, expectations may become excessive and push share prices up still more. in certain cases, moreover, expectations of increased profits may lead to higher lending. all this can generate a vicious circle where a further increase in asset prices results in a continued expansion of credit. with excessive euphoria