First, however, it is important to underscore the advantages that accrue from a global financial system of the type that has been developed in the past decade. The countries which participate in the international capital market tend to have higher per capita growth rates than other countries. The globalisation of production and trade calls for new solutions for payments and financing. It is also a great advantage to have a financial system that is capable of channelling savings to those parts of the world that need them most for investment. However, participation in the international capital market presupposes that a country has an adequate banking system with accounting regulations and other institutions, such as thorough supervision that ensures sound banking practices. This has evidently not been the case in a number of the countries that are now affected by the crisis. Nor should we forget that the banking system in Sweden was not fully prepared at the time when our credit market was deregulated. If loans from the international capital market are channelled to a country where the banking system and other financial institutions are not ready to function in this community, the result may thus be loan losses. But, as you know, it takes two to tango. It may well be asked why banks in the industrialised countries have arranged loans to countries that evidently were not yet sufficiently sound borrowers. Capital has been flowing to emerging markets in a broad stream in recent years.
New regulations may simply do more harm in the present situation. But the players in international financial markets do need to review their systems for evaluating risks. Risk assessments based on historically determined correlations between different assets may be inadequate when earlier patterns are broken and the supply of liquidity changes. In the short run the problems in the global economy must be solved at their origins. Via the International Monetary Fund, in certain situations the international community can contribute liquidity if the countries in question are prepared to take measures. It is, indeed, an enigma that the world’s second biggest economy, Japan, has not managed, year after year, to tackle the problems in its banking system. Economic development in Japan is highly important, not least for other countries in the region. All observers are agreed that the problems in the banking sector must be rectified. Fiscal measures are also called for. Nor would I rule out the introduction, as part of a stability programme, of a numerical inflation target that might help to modify the negative expectations. It is my hope that the current signals about future measures will be fulfilled. The US Federal Reserve is also strongly focused on the problems in the global economy. In Europe the action of central banks will be determined by the extent to which Europe is affected by what is now happening. To date, however, it looks as though Europe is moving in the right direction.