Stefan Ingves: The monetary policy landscape in a financial crisis Speech by Mr Stefan Ingves, Governor of the Sveriges Riksbank, at the Swedish Economics Association, Stockholm, 31 March 2009. *  *  *  Introduction "The monetary policy landscape in a financial crisis" is the theme of my speech this time. I thought for once that I would begin by showing you a picture. The slide shows an oil painting that was done in 1842 by the English artist William Turner.1 It is called ”Snow Storm – Steam-Boat off a Harbour's Mouth”. It is part of the collection at the Tate Gallery in London. The only thing you need to know about the painting just now is that Turner used a very special technique. He built up the picture gradually by painting several thin, semi-transparent layers on top of each other. He then added somewhat thicker, more pastose sections. As you can see, this layer-by-layer technique gave his paintings a special lustre and a special atmosphere. We would probably say that the atmosphere in this painting is dramatic. Turner's technique can also act as a starting point for a description of the situation today. Reality is made up of different layers. Every layer that is added or peeled away reveals a partly new landscape. We can compare the financial crisis to the snow storm in Turner's painting. In order to paint the picture of the complete storm we need to begin with a layer that describes the macroeconomic preconditions, the macroeconomic landscape.
But before I get into the details, let me say that I believe the LTCM episode and the supervisory response to it is fundamentally about two things: leverage and good judgment. Leverage is a fact of life in our financial world, and is a key part of the risk-taking necessary for the creation of wealth. But sometimes banks go too far in extending credit to their customers and counterparties. That’ s where good judgment comes in. I know - - I’ ve been there. I was a commercial banker for 22 years before becoming President of the New York Fed, and I can tell you that the most important decisions a banker makes are how to lend and to whom. Those decisions are not easy, and often involve many shades of gray. One of our aims as supervisors should be to see that banks are using the right tools to make those judgments. The importance of these issues extends beyond banks and their supervisors. Sound credit policies and procedures are essential not only for the stability of individual banks, but also – and more importantly – for the health of the financial system and the economy as a whole. This is because banks play a pivotal role in our economy as providers of credit. If banks make poor credit decisions with respect to a borrower, including a hedge fund like LTCM, the financial system and our economy will suffer.