A VERY WELL ATTENDED conference at Rosenbad, titled “Financial crisis in times of globalisation” was arranged by the Globalisation Council. A number of leading finance experts tried to answer the basic questions, (ie how, when and why) on the financial crisis.
LARS NYBERG, DEPUTY GOVERNOR of the Swedish Riksbank, remembers quite clearly how different European prospects looked only one and a half year ago.
- When the European central bank met in May 2007 to discuss financial stability in Europe and the rest of the world, I recall everyone having a bright view of the future and the financial sector. However, we were so wrong when the US subprime loans suddenly struck.
BUT HOW AND WHY COULD a crisis, initially limited to the US, suddenly spread all over the world and lead to a heavy global recession? According to Pehr Wissén, Doctor of Economics and former Deputy Managing Director at Handelsbanken, there are six different reasons for the development that the world is experiencing now.
- There have been errors in pricing in the financial markets, incomplete legal frameworks, macroeconomic imbalances, inter company problems, institutional shortcomings and, finally, the so-called shadow banking model that didn’t last.
Sarah McPhee, new CEO of SPP and Lars Nyberg, Deputy Governor of the Swedish Riksbank.
Over valued real estate in the US, the UK and Spain together with cheap loans resulted in people taking loans beyond their means. Incomplete legal frameworks with low capital solvency ratios at the banks and poor transparency have been revealed, says Pehr Wissén. The macroeconomic imbalances that slowly but surely surfaced globally also added to today’s financial crisis. These factors are a result of large savings deficits among Americans while at the same time people in China, India and the oil countries have been good savers with a savings surplus today. Other underlying explanations to the financial crisis, according to Pehr Wissén, are incomplete bank risk control systems and undercapitalized institutions like for example the largest US mortgage association, Fannie Mae.
- In fact, there is more than one explanation to the financial crisis and many of these possible explanations are rare events with low probability. If only one of these events had occurred, we could have handled it, but when they all struck at the same time, it resulted in a catastrophy, explained Pehr Wissén.
ALL SPEAKERS AGREED that the banks have been too generous and risk inclined.
- Competitors in the financial sector took way too high risks, states Lars Nyberg.
Pehr Wissén also spoke about extended flock behaviour among banks. This means that when one bank was successful, the others followed and took even higher risks. In the end this had catastrophic consequences. To avoid this in the future, Mats Odell, the Swedish Minister for Local Government and Financial Markets, stressed the importance of risk responsibility.
Erik Saers, Acting Director General at The Swedish Financial Supervisory Authority, Mats Odell, the Swedish Minister for Local Government and Financial Markets and Mats Dillén, Director General at the National Institute of Economic Research.
(from left)
TO GET THE FINANCIAL SECTOR back on its feet, private individuals and companies, as well as financial institutions, need to regain confidence in the market.
- Ordinary people have lost confidence in the financial sector and we have to consider how to change that. To build long term trust, all stakeholders in the financial market have to open up and be honest about what they do, stressed Lars Nyberg.
SARAH MCPHEE, NEW CEO of SPP, and Peter Englund, Professor in financial economics at the Stockholm School of Economics, would like to see more responsibility taken by the entire finance sector. At all times, there should be some kind of security and strong savings.
- The finance sector has an enormous responsibility and needs to learn how to resist even in good times. You just need to know when to stop before it is too late. The ones who did just that during the upward economic trend are the ones who got through it, said Sarah McPhee.
Mats Dillén, Director General at the National Institute of Economic Research, agreed and added:
- The financial market is important and essential, but it needs to be more regulated in the future.
Emelie Ring
Photo: Anne Nilsson