Lars Nyberg: Financial disturbances and the real economy Speech by Mr Lars Nyberg, Deputy Governor of Sveriges Riksbank, to Danske Securities, Stockholm, 11 March 2002. *  *  *  I would like to begin by thanking you for the invitation to come here to Danske Securities and speak to you, who are at the real heart of the financial sector, but also heavily dependent on occurrences in the real economy. In my speech today I intend to concentrate mainly on the relationship between developments in the real economy and financial developments, as it has looked in the past and as it may look in the future. The Riksbank's two objectives, maintaining price stability and promoting efficiency and stability in the payment system in a broader context, have both real economy and financial aspects. The objectives are more closely linked than might be thought initially. Turbulence on the financial markets has repercussions for economic activity and developments in the real economy and thus great significance for the shaping of monetary policy. It is difficult, if not impossible, to pursue an effective monetary policy when the financial markets are functioning inefficiently. At the same time, price stability and stable, low inflation expectations help to create security and stability in the financial markets. This far it is quite simple. It is rather more difficult to make an in-depth survey and understand the relationship between the financial and the real economies.
However, there is a risk that the complexity of these instruments will increase the difficulty of seeing to which credit risks companies and banks are actually exposed. 2  BIS Review 18/2002  The complexity of the financial instruments and the fact that they are often found, in various forms, on both the asset side and the liability side of companies' balance sheets as well as "off balance sheet", makes it difficult to detect the financial risks within banks and companies. This is particularly serious as an increasing number of households have their savings in these companies' shares, but nor is it easy for professional analysts and portfolio managers to see. The collapse of the American company Enron can serve as an example of the problems connected with the development of complicated financial instruments. A lack of understanding of the instruments used and a lack of transparency in the company's accounting meant that directly after the collapse there was considerable concern over possible contagion effects. Here I do not mean the evident breach of the regulations in force, where auditors burn documents and senior managers sell shares in the company prior to publishing negative information. Enron raises a number of other, in the long term more fundamental, issues. Today, I shall limit myself to discussing three of these. Firstly, Enron was basically an energy company, which in time came to pursue financial operations on a large scale, but without coming under the supervision to which financial companies are normally subjected.