For a period during the winter, major Swedish companies encountered difficulty in obtaining funding on the international credit markets and so turned to the Swedish banks, with the result that they squeezed out smaller companies, to a certain degree. The Swedish economy, which is strongly dependent on exports, was also hit hard by the collapse of world trade. Many foreign  companies reduced their investment levels in order to deal with their liquidity problems, which subdued demand for Swedish export goods. Some lessons from the crisis What lessons can be learned and what do these lessons mean in terms of economic policy and the actions of the central banks in the future? Here are a few thoughts, although the list is far from exhaustive. There are serious shortcomings in regulation and supervision. This is entirely evident, forming the subject of intensive discussions among politicians and in the media. It is beyond the scope of this speech to provide a comprehensive account, so I will make do with pointing out a couple of the overall problems. One main problem has been that banks and other financial institutions have had too little capital in relation to the risks they have taken in their balance sheets, whether these risks consisted of traditional lending, the holding of various hard-to-value securities or large shortterm positions taken when trading. This meant that many financial companies, for many years, were able to provide high returns on equity, higher than in most other industries.
However, experience tells us that increased interest rates are seldom enough to break the trend. Optimism can be such that investors are glad to pay the extra interest costs or to accept a correspondingly lower return on assets, as they are convinced that prices will continue to rise. For example, in Sweden in 1989, the direct yield requirement on the commercial property market lay at around 4 per cent, while a risk-free five-year government bond had a return of up to 12 per cent. So the market preferred an unsecured property asset to a covered bond with a return of 8 per cent more! No monetary policy can defeat that kind of optimism. Furthermore, it could be the case that inflation is low despite the strong economic development. If this is the case, monetary policy may need to become more expansionary to attain the inflation target, which, in turn, may fuel financial imbalances. During the years preceding the current crisis, increasing globalisation resulted in a heavy dampening of import prices, which pushed inflation down and contributed to an expansionary monetary policy in many countries. Monetary policy thus fuelled the bubble, rather than counteracting it. If a crisis becomes really serious, as is the case with the present crisis, the conditions for conducting monetary policy become very difficult. The situation became exacerbated when rising risk premiums increased the interest rates affecting households and companies. Falling inflation and inflationary expectations led real interest rates to increase even more.