For instance, Norwegians could only purchase foreign equities through a fixed pool established in the 1960s (by using the so-called “security dollar” market), and foreigners’ investments in Norwegian equities were strictly regulated and actually limited to NOK 50 000 per person until 1979. That ceiling was raised to NOK 1 million in 1979. Experiences over the past year may cast doubt on the effectiveness and benefits of international capital markets. Nevertheless, history has seen a number of deep financial crises, and it is my belief that market conditions will also return to normal this time. I am confident that private entrepreneurship and public limited companies will continue to exist as the primary organisational bodies for commercial activities. Owners and investors will also be needed in the years to come. But capitalism will have to adapt. After all, the willingness to trust the free play of market forces in finance has been seriously impaired. International stock exchanges lost more of their value in 2008 than in any other single year in recent history. Absolute results, especially with regard to equities, were highly unusual. Many investors have suffered losses. As a result of this experience, required returns will be higher in the future. An investor such as the Government Pension Fund – Global will earn more in the long term because of wide fluctuations in equity values. 1  2  National Transport Plan 2010–2019 (St.meld.nr.16 (2008-2009). BIS Review 68/2009  The Fund has a longer investment horizon than the vast majority of other market participants.
And one of the most important duties of a central bank is to safeguard the financial system. In a crisis, that means acting as lender of last resort, supplying emergency loans to financial institutions when normal funding isn’t available. The U.S. Treasury Department and other federal agencies were also doing all they could to shore up the financial system. Now, I know that this financial support to big banks and Wall Street firms made many people irate, especially when so many Americans were losing their jobs or their homes. We should remember, though, that ordinary people suffer terribly when the financial system breaks down. The ultimate goal of our programs was to avert a major depression and much higher unemployment. Because of these programs, we were able to avoid a meltdown of the financial system and head off a depression. But we couldn’t prevent a terrible recession. The shock waves from the burst housing bubble and the financial crisis were simply too great. As it happens, it’s normal that severe recessions and sluggish recoveries follow financial crises.1 Research at the San Francisco Fed and other places shows that downturns following financial crises are much more severe when the preceding expansions had unusually rapid growth of credit and leverage.2 When the credit pendulum swings, it takes many years for household and business spending to return to normal. And, in fact, there was extraordinary credit growth before the recession.