Crises will always come back – but the impact can be mitigated

14 september 2010

We have learned a few things from previous economic crises. But our thinking about the future is still too short-sighted, and we forget that crises come and go.

“Once a crisis has passed and things start going better again, we think the situation will last forever,” says Lars Magnusson, professor of economic history at Uppsala University.

In his research he has been amazed at how incredibly quickly people forget. There are power economic interests in a boom. Everybody wants to make money and increase their profits.
“There’s a greediness in this. Everyone wants to raise their profits and can’t see when they’ve been in for too long. As long as we have a market for stocks and such, there will be crises,” observes Lars Magnusson.

But he does feel we have learned a few things over the years. The fact that we survived the crisis of 2008-2009 relatively unscathed is partly because since the long and deep crisis of the 1990s politicians have taken several measures to moderate the effects of future economic crises as much as possible. Monetary policy has changed, and the Bank of Sweden has gone from being politically controlled to an independent institution tasked with keeping inflation below two percent.

Moreover the negotiating parties in the labor market learned the importance of limiting the wage gap by entering collective contracts with roughly the same percentage level.
“The pioneering industrial contract from 1997 has held the market together. Industries and unions agreed on small wage increases but higher real wages, thanks to lower inflation. This has given Sweden a good point of departure compared with other countries.”

But these measures are not sufficient, according to the professor. To moderate crises, we need good banking legislation in combination with effective routines for spotting risks and revealing bubbles.
“Otherwise we will continue to experience severe crises. As a matter of fact, we can still see traces of the 1990s crisis. Employment still hasn’t bounced back from that.”

This is why Lars Magnusson welcomes EU initiatives for new types of regulations for the finance market.
“We don’t learn spontaneously from our mistakes. This is why we need institutions in society,” he says.