And this quest for shareholder returns was in turn aided and abetted by creditors who, far from pricing this rising risk, charged a low and falling interest rate to the banks, further fuelling risk-taking incentives. This risk-shifting crystallised as the crisis broke. At that point, yields on bank borrowing shot up and risk-taking was crushed. Creditors bore large losses, which would have been larger still without government support. This experience makes clear that risk-shifting is not a theoretical phenomenon; it is very much real, with large costs for creditors and for the wider economy. Indeed, the welfare implications of risk-shifting are doubly troubling. Not only does it generate excessive risk-taking and credit creation during upswings. As importantly, it also contributes to excessive caution and a credit crunch during the downswing. Risk-shifting results in twosided deadweight costs, for creditors and for the macro-economy. 19 Both have been much in evidence over recent years. (b)  Risk-alignment  A related, but distinct, micro-economic risk friction concerns how rights are allocated to different stakeholders in a company. Standard corporate finance theory sets out, on the face of it, a coherent allocation of control rights and risks. Shareholders have a junior claim on the profits of a company, in that they are paid out after employees, creditors and the taxwoman. Theirs is the riskiest piece of the profits pie. This means “ownership” is really a misnomer when applied to shareholders. What defines shareholders is not that they own most or all of the company.
In Sweden CPI inflation has fallen from around 5 per cent in 1994 to approximately 2 per cent in 2003. Even in a more long-term perspective, inflation shows a downward trend, which is illustrated in a figure showing inflation in OECD countries. Other parts of the world have experienced a similar development. The IMF’s previous chief economist Ken Rogoff has demonstrated in an article that global inflation has fallen from 30 per cent to 4 per cent between 1993 and 2002. Which factors could lie behind this remarkable slowdown in the rate of price increase? I believe that it is mainly a combination of three factors: (1)  A change in monetary policy with independent central banks applying inflation-targeting,  (2)  IT investments enabling large-scale cost savings and  (3)  Globalisation that entails, among other things, increased competition from new low-wage countries and pressurises producer countries towards greater productivity. 1. Independent central banks with inflation targets  At the beginning of the 1990s, in the aftermath of the years of overheating and crisis, a process of reorientation of economic policy began in Sweden: the tax system was reformed and combating inflation was given priority. The Riksbank decided at the beginning of 1993 to introduce an inflation  BIS Review 21/2004  1  target, defined as 2 per cent with a tolerated deviation interval of plus/minus one percentage point, and fiscal policy was increasingly oriented towards budget consolidation. Similar developments took place at around the same time in many other countries.