##ff have described how economic problems and bursting speculation bubbles have led to financial crises and subsequent sovereign debt crises time and again over the last 800 years. developments in the banking system, 2007 and on so far, the european banks have not regained their credibility in the same way as the us banks did in 2009 and the swedish banks did in 1992 and 1993. a great deal of uncertainty still prevails over which european banks are robust in the long - term. according to one estimate, the total decline in the value of assets on the european credit markets amounted to eur 184 billion by the summer of 2011. the same publication made the assessment that losses over the years to come could amount to over eur 200 billion, of which eur 125 billion would derive from losses linked to government securities. 6 the imf has calculated that the effects of the sovereign debt crisis may amount to eur 300 billion. 7 even so, the european banking sector was reported to have a larger balance sheet total in 2010 than in 2008. this reflects the fact that the problem assets have still not been addressed. for long periods, european banks have had problems obtaining funding on the market. this uncertainty is also reflected in the riksbank ’ s calculations of the stress index for europe. ( figure 1 ) credit suisse ( september 2011 ) : “ european banks ”. imf ( september 2011 ) : global financial stability report. bis central bankers ’ speeches figure 1 : european stress index state support to the banking sector has been significant. in addition to eur 90 billion in direct public expenditure, governments and central banks have paid out the equivalent of 13 per cent of gdp, eur 1. 6 trillion, in emergency liquidity assistance and support for the banks. the total commitments amount to triple this figure. 8 the problems in the banking sector have still not been addressed the management of the present european banking problems can be contrasted with the way we handled the swedish banking crisis twenty years ago. of course, although we are often considered to have succeeded well in sweden in 1992, this was due to a relatively beneficial political environment, rather than intellectual superiority. even so, the differences illustrate an important insight from economics – more specifically, the significance of asymmetric information. like other central banks, the ecb intervened in 2008 to support liquidity by various means, including offering loans at longer maturities. unlike in sweden, these extraordinary loan facilities continue to be available. furthermore, the ecb has supported the markets for both covered

also cause problems if one fails to identify the imbalance sufficiently early and tries to remedy it too late. then there is a risk of larger fluctuations in both asset prices and economic activity, completely contrary to the initial aim. is this criticism justified? yes, it is difficult to identify an imbalance at an early stage. the fact that exaggerated optimism and high risk propensity can push up property prices and lending does cause problems, for instance. it is difficult to capture this type of factor in the models used to analyse the economy, as they are often based on everyone acting rationally, at least on average. moreover, it is difficult to capture the risk of a bubble bursting and the consequences this might have. the idea behind “ leaning against the wind ” is that the actual probability of the shock occurring can be reduced by the policy the central bank is conducting today. it is difficult to incorporate this into the formal analysis. however, the scope for identifying an imbalance is probably better in the property market, which goes hand in hand with credit growth, than in other asset markets. the financial crisis has also contributed to central banks and other authorities now working even harder to better capture financial variables in their models and other analyses. constructing early warning systems that signal imbalances in, for instance, the property market is also part of this work. however, it is difficult to say today how much we will eventually achieve here. but even if the criticism is justified – is it sufficient argument for not “ leaning against the wind ”? one must compare what the central bank can reasonably be expected to win and lose by taking action with the possible effects of not doing anything until a potential bubble has burst. i will return to this in a moment. a too weak and blunt weapon? another argument against “ leaning against the wind ” concerns the effectiveness of the interest rate in this context. to “ lean against the wind ” one must be able to count on dealing with the imbalances by making reasonable increases to the policy rate. one hypothesis is that the optimistic mood often prevailing during a boom in the property market means that significant increases in the policy rate are required to have an effect. otherwise it would be rather like trying to bring down an elephant with a pea - shooter. the critics claim that the severe monetary policy tightening that would be needed could have serious effects on the rest of the economy. here we also have the problem that the interest rate is a blunt weapon that affects the entire economy and cannot be