We are all in it together

By Paavo Lipponen
The writer is former Prime Minister and Speaker of Parliament of Finland

This article was published on NORDICUM 6/2008

In November 1977, in a speech to the Finnish-American Chamber of Commerce in New York City, I quoted J.K. Galbraith’s two principles for understanding the American economy:

Rule Number One: “Under all circumstances you should mistrust and hence ignore all official economic forecasts.”

Rule Number Two: “Mistrust likewise the forecasts of other economists.”

Within that year, 1977, the forecast for growth in the Finnish economy had been revised from five per cent down to zero. The European economy was plunging into a recession. Today we are, as The New York Times put it, all in it together in a global economic crisis.

Every major player, including China, is making a huge effort to fight deflation as the financial crisis is rapidly spreading into the real economy. More layoffs in practically every sector in the economy – so far with the exception of the public sector – are everyday news in Finland, too.

How could it happen that the world should witness such a rapid and steep decline, never seen before? This is the first example of the integration of economies into a global system, where the effects of a major crisis in a major player can spread to the other side of the world in seconds. This time no country, not even China or Russia, is unaffected by the financial crisis.

Last time a comparable crisis happened in 1929, it took three years for the US government to react. This delay made the recession the Great Depression.

This time around, the necessary leadership is emerging in the United States and in Europe to make quick monetary and financial policy decisions. We are witnessing an unprecedented show of concerted action by leading nations and the European Union.

The American presidential election, the election of Barack Obama, has generated optimism and confidence in new leadership by the United States that is so badly needed to tackle all the daunting challenges at this turning point in history.

The worst is still to come. Will the measures taken and planned be sufficient to remove the lack of confidence that keeps people from consuming and buying housing, enterprises from investing? Luckily, orthodox, ideological economic doctrines are being dumped as governments take emergency measures to save their economies.

State intervention is no more taboo, Keynesianism is back en force. Deficit spending makes sense if investment infrastructure and houses, education and new technologies are financed for future growth. The middle and low income consumers need an income boost through direct transfers and lower taxes. Unemployment benefits must not be cut and pensions need state guarantees.

This is no time for a post mortem of the crisis. But to prevent another recession, some conclusions must be drawn. We need more and better regulation, also on the global level to oversee the financial markets. Global financial architecture needs to be overhauled.

In the final analysis, this is a moral crisis. How could the financial community tolerate the manipulation that went on with the subprime loans? Why did the do-good federal government not see what was happening?

The arrogance in the financial sector reached record levels. The height of it in Finland was the statement by a financial tycoon about ordinary people only bringing “sand into bank offices with their feet”. Three trillion dollars have vanished like sand in the wind because of such an attitude.

Banks and governments are now on their knees, begging the common man to trust them, consume and take mortgages. Is anybody on Wall Street and elsewhere in the financial community repenting? That’ll be the day.