the same time, the regulatory system must be designed to prevent overly large differences between what is profitable for society and what is profitable for the private sector. this creates good conditions to make realistic assessments of the future and to take the right decisions regarding investment, consumption and financial investments. a very topical issue is how the accounting and auditing rules should be designed to create the best possible conditions for lenders and investors to form an opinion of a company ’ s future profits and ability to pay. it is never possible to completely prevent unlawful actions, but is there something that can be done to avoid such scandals as have arisen with the fall of enron and worldcom? transparency must in any case be our guiding star! the present situation finally, i should like to comment on the present situation. quite contrary to what many feared, the downturn in economic activity following the unusually strong and prolonged upturn that was driven by the us economy appears to be moderate and short - lived. growth appears to be on the way up already this year. the heavy fall on the stock markets, terrorist acts, the crisis in argentina and the enron affair do not seem to have had excessively negative effects on the global economy. there is still some uncertainty, particularly with regard to the capacity of the us economy to once again take on its role as engine for growth. this uncertainty is partly connected with whether we have really seen the entire downside of the financial bubble, and partly with the consequences of the terrorist attacks. uncertainty has increased somewhat in recent weeks, but we can still assert that the turbulence in the financial markets does not appear to have had particularly major effects on the real economy. what could be the explanation for this? an important difference compared with earlier financial crises that have been preceded by high asset prices, strong growth and a large credit boom is that economic policy has now provided better fundamental conditions for stability than before. serious financial crises have often, as i mentioned earlier, been reinforced by the fact that various types of economic policy change have contributed directly or indirectly to forcing indebted households and companies to reassess their future ability to pay. the game rules have often been changed in a way that has meant that there were strong reasons for a downward revision of expectations for the future. the expectations on which companies and households have based their loan - financed consumption and investment decisions have afterwards proved to be overly optimistic. banks which have not been able to predict these changes and which have also had under - developed risk management

also because a rise in the value of the companies'assets increases their credit ratings. at the same time, financing consumption, investment, property and financial assets through loans will lead to an excessive credit boom. the liquidity created when the banks increase their lending can further push up asset prices. when the bubble bursts and asset prices fall, it could lead to heavily indebted households and companies increasing their savings considerably and to a fall in consumption and investment. a decline in demand would reduce companies ’ profits and increase the number of bankruptcies. bankruptcies lead to losses in the banks, while the value of the assets taken as collateral for loans would decline. a deterioration in bank profits can reduce the supply of loans and mean that investments that would have been profitable do not get off the ground. in the worst possible scenario, systemically - important banks would suffer a bank crisis. falling asset prices thus risk triggering processes that could eventually lead to a recession. psychological factors strengthen both an upturn and a downturn in asset prices and real demand. sweden, like many other countries, as you know has experience of this type of development. the costs to society during the years following the bank crisis were very high. however, rapidly rising asset prices do not constitute a problem in themselves that requires measures. deciding factors here are whether there is reason to regard asset prices as fundamentally exaggerated and whether the bubble has led to excessive demand in the real economy, as well as misallocation of resources and excessive indebtedness. however, a financial bubble that only creates winners and losers among the financial operators without spreading to the real economy is hardly cause for concern, as long as the financial system can carry out its tasks efficiently. inflation targeting stabilises production although there may be reason in certain situations to counteract exaggerated asset prices and the imbalances they create, the question is what measures are available. there is always a risk that intervention by authorities may in itself create more problems than one is trying to solve. however, first and foremost i would like to point out that monetary policy aimed at stabilising the inflation rate should basically reduce the risk of over - valued asset prices leading to an exaggerated real demand. fluctuations in the level of resource utilisation and in the output gap are traditionally assumed to be reflected in the inflation rate. if inflated asset prices stimulate demand in the economy, without a corresponding increase in the potential growth rate, inflation will rise. if the central bank anticipates this, monetary