When share prices collapsed, households experienced substantial losses in their financial wealth, bringing the ratio of financial wealth to disposable income back to levels similar to those witnessed at the end of 1997. The costs of the developments in financial markets over the past few years, which were often linked to the “new economy”, can also be measured by a critical erosion of trust. Examples of accounting malpractice, corporate greed and imprudent stock market valuations have started to appear in increasing numbers, undermining the basic trust and confidence of investors in financial markets. There has been a lot of discussion about whether this unfortunate behaviour has been promoted by  3  D. Erasmus, “The Praise of Folly”, (translated by J. Wilson), Great Mind Series, Prometheus Books, 1994. 4  See for “irrational exuberance”: A. Greenspan, “The Challenge of Central Banking in a Democratic Society”, 5 December 1996, speech at the Annual Dinner and Francis Boyer Lecture of The American Enterprise Institute for Public Policy Research, Washington, D.C.: “How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy?”; R.J. Schiller, “Irrational Exuberance”, Princeton University Press, 2000; See for “infectious greed”: A. Greenspan in his Testimony before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, 16 July 2002: “Why did corporate governance check and balances that served us reasonably well in the past break down?
Thus, price stability is the main objective of monetary policy in all of these countries and has in fact become the recognized single target for monetary policy in numerous countries. The reason for this emphasis on price stability is that it creates the best conditions for balanced growth and increased welfare. The Icelandic financial market has developed very rapidly over the last ten to fifteen years. It is a small market by definition, but has nevertheless the same institutional set-up as larger industrial countries. Aside from the Central Bank, these include commercial banks, savings banks, securities companies, various investment funds, insurance companies, large and important pension funds and last but not least a stock exchange - linked with the other Nordic exchanges - where the shares of 60 to 70 Icelandic companies are listed and traded on regular basis. Supervision of the activities of all of these institutions is in the hands of a unified financial supervisory authority that has broadly the same legal powers and follows the same methods and standards as supervisory agencies in other European countries. Important rationalisation has taken place in the Icelandic financial system. Until a few years ago, two of the main commercial banks were fully government owned and so were a host of so-called investment credit funds. The funds were unified in a single institution, which was subsequently privatised.