capital and other policy errors ”. to say that the key to avoiding future crises in emerging markets must be found in domestic reforms is not to deny that part of the solution may still lie in measures that change the way in which international financial markets sometimes operate. while financial liberalisation and international financial integration bring unquestionable benefits, they can also be subject to episodes of excessive risk - taking. in recent years, there does seem to have been imprudent lending, and not just to emerging market economies but also to borrowers within the industrial world. in part this has been spurred by competitive forces. that such forces will diminish as financial restructuring accelerates seems unlikely. information asymmetries lie at the heart of market failure, and the market's way of resolving them can give rise to unpredictable outcomes. ensuring that markets have adequate information about national economies, the strength of financial systems, aggregate positions and the financial standing of counterparties is important. equally important, if not more so, is to ensure that market participants'approach to risk management reflects the full balance of costs and rewards implied in their decisions. given the costs and the difficulties of managing the successive crises over the past decade, we must continue to devote considerable efforts to avoiding future crises and try hard to understand the kinds of vulnerability that lie behind them. the work now being carried out in various international fora is thorough and can be summarised under three headings : crisis prevention, crisis containment and crisis resolution. much of this work involves international institutions like, for instance, the international monetary fund, the world bank, the bank for international settlements, the basel committee on banking supervision, and the oecd, as well as the financial stability forum. however, it is with national authorities that the often hard work of implementing policies and codes lies. the measures will contribute to better financial stability only if countries actually adopt and implement them. a crucial ingredient in achieving this is of course to involve countries, formally or informally, in the development of the policies, codes and standards. but even if that is achieved, i know from my own experience how difficult the actual implementation sometimes can be, not least for political reasons. the events of the past decade have made it clear that greater efforts are needed to strengthen the functioning of markets. i would like to make the point that today ’ s favourable trends in the world economy should not lead us to conclude that the danger is over. we have witnessed too many crises in the last decade

factor that probably also contributed was that there was a global saving surplus that meant there were large capital sums to be invested in the financial markets. this surplus pushed down the interest rate on risk - free assets. the combination of a lot of money to be invested and low risk - free interest rates contributed to an increase in the demand for assets that were profitable to invest in and led to an intensified hunt for high yield. this type of environment often inspires great inventiveness in the financial markets and many new financial instruments were also created. these were often complex and difficult to valuate correctly. but in the optimistic climate prevailing then – everything had gone so well for so long – it was nevertheless easy to sell them. those who invested in the new instruments disregarded, or failed to sufficiently understand, the risks that were “ inbuilt ” in them. the financial supervisory authorities and regulations also lagged behind this development. the problems in the international financial markets began to become more apparent as early as summer 2007. but the swedish economy and the swedish financial markets long appeared able to manage fairly well, despite the fact that the turbulence was having more and more effects on the world around us. of course, economic activity in sweden began to weaken as international economic activity declined, but this did not initially seem to entail any very serious downturn. however, when lehman brothers filed for bankruptcy in september 2008 the situation worsened dramatically. the confidence that had existed between financial institutions was shaken to its foundations when no one was certain who might be next in line to default on their payments. now the swedish financial markets were also hard hit and some sub - markets were practically at a standstill. the earlier expectations that the decline in economic activity would be fairly mild were replaced by a much more negative view of future developments, both in sweden and abroad. the lehman brothers crisis was also the prelude to a series of measures to stabilise the swedish financial markets. at the same time the riksbank took several rapid and resolute steps down the interest ladder to alleviate the effects of the crisis on economic activity. still sensitive but liquidity risk has declined the first phase of the crisis can be described as a liquidity and confidence crisis. no one trusted anyone else and very few were willing to lend money and take risks. the price of loans between the banks, interbank rates, also rose sharply. since the crisis started the central banks have lent large amounts to the banks. for example, the riks