Antti Ronkainen: “We learned next to nothing from the financial crisis”

The rules of the financial system were not changed significantly after the financial crisis ten years ago. This means that a second crash is possible, says a political economist.

On 15 September 2008, the American financial services firm Lehman Brothers went bankrupt, and the global financial crisis began. Banks around the world had to be bailed out by governments, the eurozone descended into crisis, and many people lost their savings, which had been tied to funding instruments relying on the stock market.

Ten years have passed since the fall of Lehman Brothers. What have governments and central banks done to stabilise the economy?

 “During the term of the previous US president, Barack Obama, the regulation of the financial markets was slightly increased, in addition to which more oversight was introduced, including bank stress tests," says Antti Ronkainen.

Ronkainen is currently working on a doctoral dissertation at the University of Helsinki’s Faculty of Social Sciences on the political changes of central banks after the financial crisis.

 “However, no major political changes have been carried out, and neither has the freeing of the financial markets in the 1970s been undone. For example, no restrictions have been placed on banks' debt issuance, commercial and investment banking have not been separated, and there has been no prosecution of major financial crimes. Since the financial crisis global indebtedness has continued to rise,” Ronkainen continues.

 “Quite the contrary, individuals and companies have been encouraged to keep taking on more debt by decreasing interest rates, and large banks have been allowed to become even larger. In addition, President Donald Trump is trying to undo the legislation set to regulate financial sector. It seems we are already forgetting what we learned during the crisis as the economy is booming."

Important central banks

After the financial crisis, the relationship between financial policy and monetary policy changed everywhere in the world. In the near future, one of the cornerstones of the global economy will be the relationship between President Trump and the Federal Reserve Bank (the Fed). According to Ronkainen, it is exceptional for a sitting president to disagree with the central banking institution.

 “Trump wants to halt increases to the interest rate. If the Fed complies, its credibility as an independent central bank will be damaged. If the Fed continues to obstinately increase interest rates, it can plunge developing economies into a recession. After the financial crisis the level of dollar-denominated debt of emerging market economies’ non-banking sector has doubled. Turkey and Argentina are already suffering from the higher rates on dollar bonds.”

It is also interesting to see whether politicians recognise the changes to the relationship between central banks and governments. After the financial crisis, governments have been more passive, leaving more responsibility to central banks.

 “In the eurozone, for example, weak trust between governments and their low ability to act has forced the European Central Bank to take steps to prevent the zone from disintegrating. Do the European politicians assume that the ECB will save them every time they're in trouble? Will central banks even be able to function in the next crisis?” asks Ronkainen.

Markets on the rise despite insecurity

If a new crisis is coming, Ronkainen believes it will catch us by surprise. The stock market tends to be viewed as an indicator for the economy. Stock prices are still rising in the US, despite prevailing political insecurity. Traditionally it has been thought that shifts in the stock market precede economic changes by about six months. This means that the current market boom does not necessarily mean that the economy is doing well overall.

According to Ronkainen, there are several unanswered questions that may have a profound impact on the global economy: Will Turkey and Argentina remain the only problematic developing economies, or is this the beginning of another crisis for developing economies? Will the western central banks be able to stop their stimulus activities without triggering another crisis? How will Trump’s trade wars escalate? What is China’s economic future like?

 “Other uncertainties include next year’s EU elections, the political implications of Brexit as well as the future of EU–US relations.”

Another economic question mark is the rise of the radical right and populism, exemplified by Brexit and Trump's election. If the nationalist groups in the European Parliament unite, they could become the second-largest parliamentary group, ousting the social democrats.            

The relationship between policy and the economy has become more intimate. According to Ronkainen, this is particularly apparent when the economy takes a downturn.

"More and more dark clouds are gathering above the global economy. The mathematical models of economics are not sufficient to predict the future of the economy. Instead, we must consider an increasing number of political questions,” says Ronkainen.