the financial crisis in one way or another ; it is difficult to avoid it in this context. in brief, i will talk about two themes : the importance of indebtedness not becoming too high and the importance of having crisis management mechanisms in place before the event. the most important lesson : don ’ t allow too much debt to build up! of course, the financial crisis was due to many factors acting together. but one of the most important lessons was that one should beware of allowing debts to grow too much. this applies equally to households, companies and governments. this is neither a particularly surprising nor especially new lesson ; over several hundred years, financial crises have often been preceded by periods when the attitude to credit granting and lending has been too carefree. but it seems as though this is a lesson that we must experience again and again – at least once a generation, and perhaps even more often. bis central bankers ’ speeches a rapid and substantial credit expansion can cause many different problems. if the expansion is characterised by an exaggerated optimism and an underestimation and underpricing of risk, large loan losses may arise in the banks when the sentiment changes. this can lead to banks failing and ultimately to a financial crisis. we experienced this in the 1990s, and spain and ireland are experiencing it now. once the economy has entered a recession after a period of rapidly - increasing indebtedness and rising asset prices, the recovery from this level may be very slow. the reason is that the economy then often enters what is known as a balance sheet recession. 1 put briefly, what this means is that the economic agents need time to adjust their balance sheets if, for example, property prices have fallen. their incomes will for some time to come be used for amortisation rather than consumption and investment. monetary policy stimulation has less effect than normal and developments in the economy as a whole are weak. studies show that this type of mechanism largely explains why the recovery in the united states has been, and still is, so slow. 2 a financial crisis may also have other consequences. for instance, one can claim that the sovereign debt crisis we are currently in the midst of is in many ways a consequence of the financial crisis, and thus of the credit expansion that preceded it. bank crises and sovereign debt crises are often connected. public finances in many countries have weakened substantially because demand has fallen and in some cases also because they have needed to support a precarious banking system. moreover, in

germany and other countries almost a week ago, many people have asked how this affects the riksbank ’ s actions. as stated already on several occasions, the answer is : not much as long as the conditions for inflation have not changed. the riksbank targets inflation and it is this target that guides policy. in view of what has happened in the past month, there is reason, finally, to highlight a couple of points in the report. the first is that monetary policy is being conducted against the background of an economic upswing. a gradual increase in capacity utilisation is therefore probable. sweden does not differ from germany in that particular respect. the other point is the diminished risk of a development that is appreciably weaker than in the main scenario ; this assessment is supported by the latest statistics. in the light of the rising activity, the main difficulty in assessing future inflation currently lies in an uncertainty about developments on the supply side, wage formation in particular. it is difficult to foresee how the swedish economy will react to a broad economic upswing. it is therefore important, not least on that account, to analyse incoming information.