Higher volatility led banks and secured lenders to raise margins, while concern about counterparty risk and their own funding needs made banks reluctant to on-lend liquidity. Higher margins on repo and increased collateral calls due to credit ratings downgrades reduced the quantity of assets that could be financed in repo markets and elsewhere, prompting further asset sales.6 As wholesale investors started to exit, this set in motion a bad dynamic – a fire sale of assets that cut into earnings and capital. This just increased the incentives of investors to run and for banks to hoard liquidity against the risk that they could themselves face a run. This downward spiral of fire sales and funding runs was a key feature of the financial crisis. Specific institutional weaknesses The fragility of short-term wholesale funding was greatly aggravated by certain critical institutional shortcomings in these markets, particularly in the structure of the tri-party repo system and the U.S. money market mutual fund business. Through the tri-party repo market, the two large clearing banks were providing a large amount of intraday credit to securities firms each day to facilitate the daily “unwind” of the prior day’s transactions.7 In the run-up to the crisis, the daily “unwind” practice helped make tri-party repo look like a very liquid investment while still being an apparently highly durable source of funding. This masked the underlying risks and contributed to weak risk management practices.
But there are also changes in various trends in the Swedish labour market following the financial crisis that may have contributed to the low prices and wages – an increasing number of people entering the labour force, compensation rates in the social insurance systems falling and employees’ negotiating power appearing to have weakened. Developments since the financial crisis 2008–2009 thus indicate that inflation and resource utilisation are not governed solely by short-term changes in demand. Structural changes and more trend-like changes also play a role. We therefore need to give more consideration to such changes in the monetary policy analysis. In addition, I have illustrated that the flatter Phillips curve, that is, the weaker covariation between unemployment and wages, does not necessarily mean that the impact of monetary policy has declined. Monetary policy affects demand and resource utilisation through many different channels. Unemployment is one channel, but labour force participation, employment, and job vacancies are some examples of other channels through which monetary policy can have an impact. 25 The term “unconventional” may be a little misleading in the sense that, for instance, purchases of government bonds do not go beyond the bounds of what central banks normally do when conducting monetary policy. 22 [24]  Thirdly, changes in trends are often difficult to detect immediately and are difficult to assess. One consequence of this is that central banks should act more cautiously and rely more on historical correlations that are more certain.