During the crisis 2008–2009, GDP fell from a peak prior to the crisis in the fourth quarter of 2007 to a trough in the first quarter of 2009 by around 7.5 per cent. These falls are thus in the same magnitude as the insurance premium. If the premium and the damage are about the same size, is it a sensible insurance policy? It is actually possible that in certain special situations effects may arise from relatively small increases in the interest rate, when combined with words of warning from the central bank and financial supervisory authorities. As Charles Bean, deputy governor of the Bank of England, said in his paper presented at the Jackson Hole conference in 2010: ”[T]here may be times when a mixture of words and modest interest rate action can be effective in cooling excessive market exuberance[. ]”7 However, as far as I know, no such effect from limited interest rate increases has been actually proved. Moreover, there is hardly anyone who would claim that the Swedish housing and mortgage market is characterised by “excessive market exuberance”. As far as I know, no one has referred to any indicators of exaggerated and unrealistic optimism regarding current developments in housing prices. In his paper, Bean reaches the same conclusion that is supported today by extensive research and practical experience: “[G]enerally speaking, monetary policy seems too weak an instrument reliably to moderate a credit/asset–price boom without inflicting unacceptable collateral damage on activity.
Jean-Claude Trichet: Interview in Handelsblatt Interview with Mr Jean-Claude Trichet, President of the European Central Bank, in Handelsblatt, Germany, conducted by Ms Marietta Kurm-Engels and Mr Andreas Hoffbauer on 12 May and published on 14 May 2010. *  *  *  Handelsblatt (HB): Mr Trichet, you intend to withdraw all of the liquidity that you are currently injecting into the markets via the purchase of government bonds. Do we have to face inflation in the euro area? Trichet: No, not at all. Price stability is our primary mandate and over the past 11½ years we fulfilled our mandate successfully. We have not changed our monetary policy stance. The additional liquidity that we are providing through the purchase of government bonds will be withdrawn again. Interest-bearing time deposits are an appropriate way to withdraw this liquidity. HB: What induced you to take this extraordinary step on Monday morning? You had made no mention whatsoever thereof at the press conference just three days earlier. Trichet: On Thursday afternoon and Friday, we were facing a situation that we regarded as fundamentally abnormal. That situation deteriorated abruptly, sharply and extensively. The very moment where the agreement was reached in Europe to provide Greece with financial support and the imminent decision of the International Monetary Fund (IMF) to approve the Greek standby should have contributed on the contrary to ease tensions in the markets … HB: … which was not the case? Trichet: No, the contrary happened.