In Sweden, for example, in the past two and a half years the OMX index has dropped around 70 per cent. Coming as it did after the strong upward trend in the late 1990s, the fall is also unusually marked, with no parallels apart from the crashes in the early 1920s and after 1929. But as I shall be noting shortly, the current situation also differs in many respects from earlier periods of stock market turbulence. When an upward cyclical phase comes to an end, share prices normally fall back after rising for some years. The main difference today compared with earlier periods is the much higher valuations initially. There is a case for talking about the international bourses in the late 1990s in terms of a bubble. If we look at Standard and Poor’s index for the 500 largest companies in the United States, it is a fact that the level was the highest for more than a century. For an average share portfolio the historical price trend is approximately 16 times the company’s earnings. Early in 2000, however, the 500 largest companies were valued at almost 45 times the annual earnings. Valuations were far more inflated than just before the major crash in 1929. Although we do not have historical earnings data for the Swedish stock market to compare with the US figures, there are many indications that valuations here were also very high historically. The correction of share prices has admittedly occurred to the accompaniment of corporate scandals and security policy risks.
1 At the conference, Professors Carmen and Vincent Reinhart presented the results of a broad-based study of output growth and other economic variables during the ten years before and after economic crises (40–70 countries in connection with major global crises, and 16 individual country crises). 2 The findings are very clear: economic activity has a tendency to be much weaker in the decade after a financial crisis than in the decade beforehand. There are probably a number of explanations for this:  1  See http://www.kansascityfed.org/publications/research/escp/archive.cfm. 2  See Reinhart, Carmen M., and Vincent R. Reinhart (2010): After the Fall, http://www.kansascityfed.org/publicat/sympos/2010/reinhart‐paper.pdf. BIS Review 130/2010  1    GDP growth is often abnormally strong and, to a degree, unsustainable in the prelude to a financial crisis.   Financial crises are preceded by debt accumulation and followed by a long process of deleveraging.   Risk appetite subsides after a financial crisis, and what Keynes called “animal spirits” are tempered for a prolonged period of time.   Production capacity is destroyed in a financial and economic crisis.   Finally, economic policy becomes more complex, and there is more risk of error. Of course, these developments are not inevitable, and the ultimate outcome depends also on policy choices. For example, it is clear that a number of mistakes played a key role in shaping the disaster that unfolded following the crash of 1929.