Lithuania’s leading daily Lietuvos Rytas interviewed LFMI’s President Remigijus Šimašius about the roots of the current global financial crisis, its effects on future economic policies and the most rational moves to ameliorate the situation.
News about the end of capitalism and the sunset of the West is too early. Instead of passively listening to such talks in dismay or caulking, in panic, the economy’s holes with public money, we must not give in to fear and start saving.
This is the recipe that economic analyst Remigijus Šimašius suggests to Lithuanian politicians.
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In the face of this global crisis, Western world is announcing more loudly about the burial of capitalism. What is this – fear, a crisis-scale indicator or a new truth?
I agree this is not temporary disarray. Likewise, it’s not just temporary disarray which will affect financial institutions alone (although a week ago quite a few Lithuanian analysts contended to the contrary). But the popular explanation that it’s collapsing unregulated capitalism that is to be blamed for the current crisis is absolutely incorrect. It’s not unregulated, but regulated capitalism – or regulating capitalism via the basic regulatory measure, manipulation in money supply – that is going bankrupt today.
At a closer look, it’s obvious that the crisis has been spawned by a clear-cut, purposeful, active and long-lasting policy of the American government, intended to reduce the price of borrowing. This policy has been pursued in the area of house loans regulation as well. All citizens – even those who couldn’t have afforded taking loans under normal conditions – were encouraged to borrow, borrow and borrow. This was promoted even through special laws, and the key ones were passed a decade ago. These laws obliged banks to extend certain numbers of “affordable” loans, while those banks that failed were penalised.
The basic principle of this policy would sound socialistic-like. For instance, “A home for each family “ – this was declared by recent U.S. presidents. In reality it meant “more money for all.” The government went on to pump increasingly more money into the economy, increased their availability and encouraged borrowing. This has created an illusion for many people that they are very rich, which has led them to consume, invest, speculate and continue borrowing abundantly. Investment banks simply couldn’t be spectators in this race – the money that was offered almost for free would have been absorbed by others. So the central reason for this crisis was unrestricted money supply by the U.S. central bank and, in part, other central banks. Namely as a result of this purposeful stimulation of house loans, the crisis manifested itself first and most glaringly in the real estate market.
F. von Hayek, who was awarded the Nobel Prize for explaining the theory of business cycles, demonstrated that credit expansion was the central and inevitable cause of business cycles. Credit expansion is carried out through state’s deliberate and purposeful interventionist policy – namely political motives keep driving the state (who has a monopoly of money issuance) to throw ever more money into the economy and so “galvanise” it.
But the crisis-plagued U.S. and other countries do not take the opposite course – they go even further: they nationalise banks, they shell out billions from national budgets to salvage their economies by redeeming bad loans and insuring deposits. Perhaps there’s been an essential shift which will exert irreversible consequences on the minds, and not just economic ones, of Western countries?
Those moves that are being made today – guaranteeing more deposits, guaranteeing inter-bank borrowing, lowering interest rates, reducing the requirements for banks’ liquidity and, finally, nationalising banks – is nothing less but rewarding those entrepreneurs who’ve made false economic decisions by shifting the entire burden onto the rest of businesses and consumers. It’s strange but governments of large Western countries keep repeating the same mistakes that, as I’ve already mentioned, have given rise to the current crisis. Billions that are being thrown into their economies undermine the market’s abilities to depurate from incorrect investments, while businesses are being inhibited to evaluate the actual situation and to take decisions which would correspond to this reality. Steering such a policy which was pursued in the U.S. during the Great Depression means that this crisis will protract, engendering huge economic losses. Sadly, a number of countries have taken up this course – the U.S. whose authorities reacted first and the United Kingdom, Germany, Denmark and Portugal whose governments responded later but more scaringly and blindly following America’s lead. Meanwhile, Russia was the first country to implement these measures, which has led her to hopelessly squander billions of dollars without achieving any results.
The panic that forces countries to throw money into the banking sector might be understandable – the collapse of the banking system is what alarms the most. But what are the sources of funding here? The first one is a new issue of money which will again catalyse investments, cranking up the same mechanisms that have triggered the crisis. The second stream of finances is borrowing. This means that money will be sidetracked from other fields with a real economic footing and potential to non-productive areas. Eventually, this will translate into raising taxes.
The crisis has started not today. The crisis has been progressing for quite a while. And since the market was constantly prevented from cleansing itself, we plunged into the crisis deeper than we could. Global economy will not come unharmed after the current situation ends since hyper investments and hyper consumption have reached a sweeping extent. Correspondingly, market correction is and will be large-scale and painful. But the worst thing is that the crisis is being exacerbated and prolonged. It’s because countries’ leaders are panicking and hurrying to demonstrate they are “doing something” or even worse – “doing everything.” But politicians should act otherwise. First, they should limit public finances and government expenditure – to “contract” in line with private businesses. Second, to aid the business by liberalising employment regulation. Firing workers is a complicated task today, although indeed it’s vital to cut the number of employees for companies in the current context. This is a sad reality of today. These aspects are especially topical in Lithuania where authorities act in contrast to what is logical: they continue to spend lavishly and plan an even larger budget deficit, without uttering a word about plans to increase the economy’s flexibility.
Some increasingly louder voices project that these economic processes are going to markedly change the geopolitical landscape as well. Purportedly this will accelerate the U.S.’s falling from the position of the world’s key player. America is a landmark for Lithuania’s foreign policy. To which side may the balance of power be swayed, if at all? To Europe? To Asia? What effects will these processes have on Russia and what scenario of development in the neighbouring country should Lithuanian get ready to?
This is far from being the most important issue for ordinary people and businesses. However, it’s evident that the U.S.’s and Europe’s relative economic role around the globe will decline. The treasuries of Asian countries already now possess amounts of money, tremendous enough to rescue Western economies via such means that are being employed at the moment. The sums, equalling billions that are currently envisaged in rescue plans, can be found in China’s stabilisation fund alone. Nonetheless, I don’t believe this potential of the Asian markets will be long-term. So Asia will assume a relatively more significant role, but for the time being this doesn’t imply the downfall of the West.
Speaking about Russia, it’s likely that this crisis is going to harm her the most. The explosion of bubbles in real estate and securities markets in other countries are stunningly large-scale, but falling prices of commodities, including oil, is advantageous. But as for Russia, dropping prices of commodities will be yet another additional colossal blow.
Russian authorities responded to the crisis more swiftly and more fallaciously compared to European countries. Russia’s stabilisation fund, accumulated in recent years and mentioned to cheer up its society, was guzzled in five days.
I won’t venture a prognosis about how economic crisis will change Russia’s political regime. I’m afraid it will get increasingly aggressive and brutal.
Do you think Lithuania’s political elite is keeping an adequately close eye on all these processes and perceives their importance?
Can we expect much from our politicians if the political elites of even larger countries don’t go into deeper debates over these issues? The only qualitative debate is taking place in the U.S. where a bank redemption plan was rejected once by the House of Representatives. There are other countries as well were politicians haven’t start panicking yet. For example, the Czech central bank announced it didn’t intend to raise interest rates. Estonia’s ruling coalition declares that they wouldn’t try to save banks if they fail.
The situation in Lithuania, to speak frankly, is curious. And on top of everything, the Prime Minister has recently announced Lithuania is not going to contemplate any actions itself – rather, it will wait until Europe proposes some measures and then it will simply support them. Some politicians even suggest that our country should step in to rescue the bankrupt Iceland. Or worse, a completely fallacious consensus is being shaped that in the period of a crisis, the economy must be saved via public money, therefore we need to have a larger budget deficit next year.
In Lithuania, the bankruptcy of banks is feared the most. I agree with our authorities’ who calm the public that our banks, just like the Scandinavian ones, have been involved in this potentially risky segment of the global market to the less extent compared to others. But banks alone do not represent the entire economy, while their stability depends on all borrowers, not just investments in securities, which has wrecked the big banks in the U.S. and Europe.
The bankruptcy of private companies is the worst thing that may strike the Lithuanian economy. Lithuanian companies are frequently less competitive than their European rivals, so if they don’t have the abilities to flexibly accommodate themselves to the deteriorated situation, most of them may fail.
The way out of this situation that I would suggest to Lithuanian politicians is to contract themselves, save, lower taxes and, together with the private business, dive into the cold waters of the self-regulating market. This will help to depurate. This depuration must take place today. Perhaps it’s painful, but it’s indispensable.
It seems that the forthcoming government in Lithuania will be more unstable than the current one, no matter what ruling coalition is formed. The presidential election is nearing apace. Is there room for hope that politicians will be capable to adopt well-thought-of, rational and strategically justified decisions?
I believe from what I’ve seen so far is that authorities may start panicking and hurrying to extinguish the fire, which would deepen the crisis. I think that they will continue blaming capitalism and its greediness, at the same time rescuing some of the capitalists whose investments have failed. I believe they will resort to new regulation of financial institutions that will baffle markets’ recovery, while the monetary system will remain intact, programmed to undergo crises. I am more pessimistic than optimistic at the moment.
