The problems with subprime loans spread to other parts of the world economy The subprime loans were repackaged into new investment instruments which were later sold to investors in other countries. As it became increasingly evident that these securities were probably substantially overvalued, it came to light that a number of banks had suffered large losses. The uncertainty over which banks had suffered the largest losses made the banks unwilling to lend to one another. The financial crisis escalated when the US government decided in autumn 2008 to allow US investment bank Lehman Brothers to fail. The unease on the global financial markets increased and the financial crisis that had started in the United States developed into a global crisis. The supervision in the financial markets has been insufficient With hindsight, we can observe that many investors took excessive risks. The risk price they had calculated on was too low. It can also be noted that the credit rating agencies gave the new financial products too high ratings because they had not taken sufficient account of the risk that it would not be possible to sell these products in the market. At the same time, the supervision of the financial markets did not give sufficient consideration to the problems that can arise when a house price bubble bursts. The remuneration structure in the private sector has moreover encouraged short-term thinking and substantial risk-taking.
However, the Riksbank can stimulate the economy further in other ways without needing to cut the repo rate to zero. The most important measure concerns ensuring that the real interest rate, that is, the repo rate adjusted for inflation expectations, is sufficiently low. This can be done by influencing inflation expectations, which is made easier as we have a numerical inflation target and we publish forecasts for both the inflation rate and the repo rate. We can, for instance, announce that we are going to hold a low repo rate for a longer period than we assumed at the monetary policy meeting in April and show how the inflation path will then approach 2 per cent more quickly than otherwise. This would raise inflation expectations. A further possibility would be for the Riksbank to contribute to pushing down the rate on government bonds, housing bonds or commercial paper by purchases in these markets. There may also arise a portfolio balance effect if other market participants’ demand for corporate bonds, for instance, were to rise as a result of the Riksbank's purchase of government bonds. However, there is reason to await a more detailed analysis of the need for, and possibilities with, these measures. There are also a number of legal issues surrounding this type of measure that must be taken into account before such measures are implemented. At the most recent monetary policy meeting I did not consider that it was yet time to do anything other than cut the repo rate.