svein gjedrem : monetary policy and wealth management address by mr svein gjedrem, governor of norges bank ( central bank of norway ), to the board of directors of the national insurance fund, oslo, 14 march 2002. this address is based on assessments presented at the press conference following the monetary policy meeting of norges bank ’ s executive board on 27 february 2002, and on previous addresses. accompanying charts can be found on the norges bank ’ s website ( www. norges - bank. no ). * * * the guidelines for economic policy were revised last year. the expected real return on the government petroleum fund is hereafter to be used over the central government budget, and monetary policy is to be oriented towards low and stable inflation. economic agents can act on the assumption that low and stable inflation will be a constant feature of economic policy. wide variations in the price level make it more difficult to predict the real content of agreements and budgets. unexpected fluctuations in the price level may easily lead to fluctuations in the real economy and instability in financial and property markets. high and variable inflation also leads to an arbitrary redistribution of resources and income. hence price stability is the best contribution monetary policy can make to economic growth, prosperity and appropriate distribution. low inflation is the objective, and the interest rate is the instrument. commercial and savings banks have accounts with norges bank, and the executive board decides the interest rate on these. the deposit rate forms the floor for the shortest money market rates. transparency about intentions, strategies and the implementation of monetary policy makes it easier for economic agents to assess monetary policy. if monetary policy is predictable, an important source of uncertainty is reduced, and – other things equal – the interest rate required to achieve the inflation target will be lower. if economic agents are to have confidence in monetary policy, transparency regarding the central bank ’ s response pattern is probably a precondition. the interest rate affects inflation through a number of channels. an increase in the interest rate will normally contribute to reducing inflation by curbing demand for goods and services and by strengthening the krone exchange rate against other currencies. an interest rate reduction has the opposite effect. monetary policy influences the economy with considerable and variable lags. our analyses indicate that a substantial share of the effects of an interest rate change occurs within two years. two years is therefore a reasonable time horizon for achieving the inflation target of 2½ per cent. interest rates are set with a view to

the broker - dealers and their parents, including lehman ’ s broker - dealer and its parent, lehman holdings. lehman showed some signs of recovery during this period. it raised capital in june of 2008. but liquidity continued to be a significant disability. as part of its monitoring, the new york fed, in conjunction with the sec, conducted liquidity stress analyses of the investment banks, in part to evaluate their creditworthiness. those analyses suggested that lehman needed to improve its liquidity should the credit crisis intensify. again, to lehman ’ s credit, and in response to our analyses, lehman took steps to, and did, improve its liquidity. at no time, however, did anyone at the new york fed believe that lehman had sufficient liquidity to withstand what was to come in september, events that richard fuld, lehman ’ s former chief executive officer, has described as the “ perfect storm. ” 3 accordingly, as has been well - documented in the press and in the comprehensive report by anton valukas, the lehman brothers ’ bankruptcy examiner ( the valukas report ), senior federal officials, including president geithner, continually pressed lehman to find workable solutions for its capital and liquidity problems from march to september 2008. lehman executives pursued potential merger partners. they engaged in discussions with potential korean buyers and approached warren buffett. at no time did the new york fed tell lehman that it would be bailed out with taxpayer money, nor did the new york fed instruct lehman to act as if such an option was available. lehman ’ s ceo, mr. fuld, and the chairman of the lehman board of directors, thomas cruikshank, have made clear that lehman was not expecting any federal bailout. 4 both men fully understood that lehman was a public company and needed to be fully responsible for its own financial situation. lehman weekend september of 2008 will likely be remembered as an epochal period in the history of american finance. the bankruptcy filing by lehman occurred during that month, and it must be analyzed in the context of that most distressing time. on september 7, the federal housing finance agency placed fannie mae and freddie mac into conservatorship, and the treasury department used its authority, granted by congress in july 2008, to make financial support available to these two government - sponsored entities. while lehman is often considered the trigger for the systemic consequences that were to come later in the month, it is also clear that fannie