Fed eyes Nordic Model

The US Federal Reserve is examining the Nordic bank nationalisations of the 1990's

Recently, the online version of the British newspaper The Daily Telegraph reported that the US Federal Reserve was examining the Nordic bank nationalisations of the 1990s as a possible interim solution to the US financial crisis.

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Second the newspaper, a senior official at one of the Scandinavian central banks told that Fed strategists had stepped up contacts to learn how Norway, Sweden and Finland managed their traumatic crisis from 1991 to 1993, which brought the region's economy to its knees. Scandinavia's bank rescue proved successful and is now a model for central bankers, although the responses vary in each Nordic country. For example, Norway ensured that shareholders of insolvent lenders received nothing and the senior management was entirely purged, having two of the country's top four banks been seized.

Presently, the US Real Estate mortgage market (and especially the sub-prime lending) is under threat. US market mortgages represent $7,000bn and over the past decade, US house prices have increased 100%. Inflation in housing prices around the world is also impressive, making us wonder how long would it be sustainable (house prices increased over 100% in the UK and Australia, over 200% in Ireland, over 300% in South Africa, during the past decade).

In 2006 I referred to the economic crisis of the 1990’s in Finland not imagining that two years later, the Fed, very concerned by the depth of the US crisis, would be eyeing the Nordic approach for contingency options.

The Economic Crisis of the 1990’s in Finland – “Down from the heavens, Up from the ashes”

The Portuguese economic crisis started in 2002. Despite the slight recovery occurred in 2004, the growth of Portuguese economy is keeping on insufficient values (GDP growth rate below the EU average). Since that date there were many debates about European economic models of success, deserving particular attention the phenomenon of recovery, the Finnish "miracle".

The transformation of an outdated industrial complex into the largest world producer of cell phones, was crucial to the rapid productivity recorded in the 90’s.

The Finnish crisis activated a period of "creative destruction", a period of adjustments and reforms, related to technological advancements and long-term investments in technological innovation, as well to the increase of competitiveness, caused by the 1992’s currency depreciation.

The economic crisis of the first half of the 1990’s in Finland was long and profound. The real GDP, dropped about 14% from the peak in 1990 to the trough in 1993, was about four times superior to the collapse of the Great Depression of the 30’s. The unemployment rate rose from 3% in 1990 to almost 20% at the beginning of 1994. The economic crisis lowered the Finnish standard of life for many years, driving to the bankruptcy of companies and a wide scale bank crisis, and finally created serious problems to the public finances, which endangered the Finnish Nordic model of welfare state.

Finland fell down from the “paradise”, from the economical “boom” of the 80´s, in the peak of the Finnish version of Nordic welfare state. Since 1994 Finland began to recover from the recession, but the country was not the same of 1990, now with two new problems: a persistent unemployment and a worsening of the social inequalities.

In the 1980’s, the country was known as one of the Nordic rich countries, with advanced welfare systems and corporatist labor markets. Finland, Sweden, Norway, Austria and Switzerland seemed to be immune to the rise of the unemployment and related social problems experienced in other Western European countries. However, starting from the end of the 1980’s all the Nordic countries faced economical crisis, having been the Finnish crisis the most serious.

But what were the main causes of this deep recession? “Bad banking, bad luck and bad policy”. In respect to the “luck” factor, there are two important events to refer: the 1989–91 collapse of the Soviet Union, Finland’s principal trading partner in 1989, with important political-economical consequences, including losses for Finnish exporters; the Finnish EU membership since 1995, with the respective economic policy in preparation since the beginning of the 1980´s.

In respect to the banking crisis in 1991–94, there are other two factors which can explain the severity of the Finnish crisis (and also the Swedish), common to other countries which have experienced similar crises.

Like many other countries, before the crisis Finland had a system of fixed exchange rate regime and a overvalued currency (markka), resulting from inflation rate which was higher than in the core countries of European currency system; the inflation and overvalued currency were caused by the expansion of the bank credit and the deregulation of the capital market in the latter half of the 1980´s.

The deregulation of Finnish capital markets at the time and the increasing supply of credit had caused the private sector indebtedness and increase of domestic demand and asset prices, leading to widening current account deficits.

Concerning “ bad policies”, the Finnish labor market had a sharp increase in labor income taxes.

The whole document “The Economic Crisis of the 1990’s in Finland” is available via Valtion Taloudellinen Tutkimuskeskus

Reference:
Seppo Honkapohja e Erkki Koskela, Kiander (ed.), Kalela (ed.), Kivikuru (ed.), Loikkanen (ed.), Simpura (ed.), The Economic Crisis of the 1990’s in Finland, "Down from the heavens, Up from the ashes - The Finish economic crisis of the 1990’s in the light of economic and social research", Valtion Taloudellinen Tutkimuskeskus (Government Institut for Economic Research) Helsinki 2001.

"Creative destruction"

In fact, the deep causes of the current crisis of global capitalism had their origin decades earlier. During the stagflation of the 1970’s, big business and political forces mobilised to define the next stage of capitalism. They wanted to recover the class power that had been dissolved by postwar policies of wealth redistribution and social welfare, the so-called Keynesian fiscal and monetary policies. The goal of these postwar policies was to provide solutions for reducing the amplitude of business cycles, and for seeking full employment. Thus, Neoliberalism became the new economic ideology, with powerful influence in the corporate media and also in the academic circuits.

A wave of deregulation of financial markets swept over the world, besides a rapid increase of transnational mobility of capital. Corporate pressure intensified on governments to adopt neoliberal “reforms” that regularly produced state spending, and many developing countries were impelled to the neoliberal way, creating social instability and environmental catastrophes - a reality that is missing from the corporate media headlines and front pages.

This process has been a form of “creative destruction”, weakening and breaking institutions, social welfare, health care, education and culture. History shows that governments have been generally powerless to fight the unavoidable and damaging capitalist ‘business cycles’.

Although unstable and unfair, the capitalist system has evidenced a capacity to reform itself to survive economic business cycles. However, these ‘business cycles’, stimulated by corporate greed and maintained by deception of the people, cause huge human and environmental costs to the planet.

Reference:
'CREATIVE DESTRUCTION' – THE MADNESS OF THE GLOBAL ECONOMY, medialens.org

Image: www.kwaves.com [PDF]