Money and power – what can we learn from financial crises?
The launch of the book about the Riksbank, "Money and Power" and the panel debate "What can we learn from financial crises?" will be broadcast on the national television channels SVT 2 and SVT 24 in the programme "24 Direkt" on Wednesday 25 March at 9.30-11.30.
On 13 March, the Riksbank launched the book "Money and Power – From Stockholms Banco 1656 to Sveriges Riksbank today". This history of the Riksbank has been written by the historian and social scientist Gunnar Wetterberg. The author presented he book which will be on sale in the bookshops in April.
In connection with the presentation of the book, a panel debate was held under the heading "What can we learn from financial crises?"
A summary of the panel debate is presented below.
Money and power – what can we learn from financial crises?
The subject of the panel debate was "Money and power – what can we learn from financial crises?". The members of the panel were the former First Deputy Governor of the Riksbank, Irma Rosenberg; the Governor of the Riksbank, Stefan Ingves; Professor and adviser to the European Commission, Lars Jonung; and the author and Professor Emeritus of history, Göran B. Nilsson. Deputy Governor Svante Öberg led the discussion.
The members of the panel began the debate by reflecting on past events in relation to the current financial crisis. Irma Rosenberg noted that already in 1857, when Sweden experienced its first major financial crisis, Minister of Finance Gripenstedt realised that there was something special about banks. It is more important for the State to support banks in crisis than other companies, such as Volvo or Saab in the present crisis. This is because the banks are at the hub of the payment and credit systems and these systems must work if the rest of the economy is to function.
Stefan Ingves referred to 1809 when Finland separated from Sweden and the Finns created their own currency. Swedish banknotes were exchanged for silver, which had a fixed exchange rate. The fixed exchange rate for silver threatened to become disastrous for Sweden. The question was whether there was sufficient silver in Sweden. He linked this situation to the current crisis in the Baltic countries which also have a fixed exchange rate, but in this case linked to a currency board with foreign currencies. He noted that this was an example of "been there, done that, although it was a long time ago", and said that similar problems recur at regular intervals for new generations in every country.
The economist Lars Jonung said that financial innovations over the centuries have had an impact on the economy. Banknotes, which were introduced in 1668, were an invention that led to lower transaction costs. He also mentioned today's structured financial instruments from Wall Street as examples of financial innovations. In the case of new instruments it is not unusual that buyers and sellers are initially uncertain about the exact nature of the instruments. The view of whether a country should have a fixed or variable exchange rate also fluctuates. He pointed out that every bank crisis affects the position of the Riksbank and the public's view of monetary policy.
The historian Göran B. Nilsson said that it is possible to make forecasts and discover risks for future crises by studying history. He felt that we must attach more importance to history so that we make the most of the opportunities to learn from it.
Svante Öberg asked why the current financial crisis had not been predicted. Lars Jonung believed that this was partly due to psychological factors. It is simply too depressing to say that what we are doing now is not sustainable. He quoted an American bank director: "As long as the music is playing you have to dance."
Göran B. Nilsson felt that simply referring to human nature was not the complete answer. The human psyche can also be better understood by studying history. Historical research should improve our ability to predict the future.
Stefan Ingves pointed out that there is a huge difference between an individual financial institution experiencing difficulties and an entire economy suffering a crisis. If a country wants to avoid a financial crisis there are two important components. First, it is essential that central government finances are in order and, second, price stability must be maintained. He also said that it is when money begins to run out that people come up with a lot of inventive ideas to make it look as though there is still plenty of money left. This makes it difficult for external observers to see that things are getting out of control.
Irma Rosenberg pointed out that we are actually quite good at discovering problems in the financial sector. We do not really know how many crises we have in fact prevented. The responsibility for the present crisis can be divided between several factors such as the policies of the central banks, inadequate regulation in the USA, human psychology and the excesses that always seem to be with us. She said: "History can teach us how to handle crises, but we will not be able to avoid them".
However, there are people who issued an early warning. Svante Öberg referred to Bill White of the BIS who in the spring of 2007 was a lonely voice crying in the wilderness when he said that the situation on the credit markets was unsustainable. Credit and the supply of money were increasing too quickly.
Stefan Ingves reminded us that all financial systems are capable, sooner of later, of repairing themselves. They perform a major practical function as a monetary economy is better than bartering.
The panel debate concluded with a discussion about the Riksbank's transparency. Lars Jonung asked how much the Swedish public should be told about what is happening at the Riksbank. He referred to the history book and pointed out that it took 150 years before the farming class was allowed to participate in the political control of the bank and a further 200 years before the minutes of the monetary policy meetings of the Executive Board began to be published, with a time lag of two weeks. He wondered whether it was time to begin broadcasting the meetings of the Executive Board on the web.
All of the panel members agreed that it was better to be communicative than uncommunicative and that the openness of the central banks can help to improve the functioning of the financial markets. They hoped that the openness of the Riksbank is here to stay.
During the debate, all of the participants praised Gunnar Wetterberg's work on the history of the Riksbank and said that he has written a book that is both easy to read and very interesting – not least with the prevailing turbulence on the financial markets and in the global economy in mind.
Text: Ingela Bäckström
