Happy thoughts not enough to spur recovery

  • 2011-07-06
  • From wire reports

VILNIUS - One of the causes of the Lithuanian financial crisis is that the former long-serving governor of the Bank of Lithuania, Reinoldijus Sarkinas, showed too much confidence in Swedish banks holding a major market share in the country, and he did not control external credit inflows, says economist Stasys Jakeliunas, reports news agency ELTA. Thus, the new head of the central bank, Vitas Vasiliauskas, is expected not to repeat the mistakes of his predecessor and supervise the banking sector better.

The global economy and the financial system have entered such a stage when crises are becoming constant, normal and inevitable, Jakeliunas said. In the future, they are predicted to become more frequent and acute. But each crisis creates new challenges and forces market participants to seek new solutions to deal with its consequences. “Understandably, the central bank can control the inflation at the minimum, but I have no doubts that it had to and has to manage credit flows, especially external credits. I think this was the main mistake of the former governor of the Bank of Lithuania [Sarkinas], that he trusted Swedish commercial banks and their risk evaluations too much,” Jakeliunas said during the presentation of the book ‘The Ascent of Money: A Financial History of the World,’ by Niall Ferguson at Vilnius University last month.

This year, annual inflation is expected to reach 3.5 percent, financial experts say. Inflation is predicted to stand at 4 percent in both 2012 and 2013.
Financial analyst Jakeliunas named the representatives of the financial system and government institutions as the main participants in financial crises. According to him, the former do not supervise the financial system, while the latter risk too much.

“They say that it was a global crisis and they could do nothing in Lithuania. I think that we certainly could have done something and the example of banks in other countries, Poland, for instance, where the central bank regulated them, and the example of Estonia where the residents and companies were indebted more than ours, but it appears that their borrowing was nonetheless more rational and responsible as actions of their banks. Maybe it is because there are a thousand and a half small and medium-sized Swedish companies in Estonia,” the economist said.

Jekeliunas emphasized the importance of supervision of the financial system and its instruments and mentioned American billionaire investor Warren Buffett’s words of “financial weapons of mass destruction.”

“He asked what would happen if we did not regulate arms trade, the usage of them and did not tackle the drug trade? However, the financial system is even of yet higher importance because the scope of it is much wider. Thus, the regulation and supervision of the financial system is what was lacking in Lithuania,” Jakeliunas argued as he named the roots of the crisis.

As for the current financial situation, the economist stressed that there is a prevailing public opinion that expectations and positive thinking are vital for the economy. “For me, it stands as an example of pulling the wool over our eyes. Expectations are important indeed, but if we say that it is they that determine the economy, rather than the economic processes, then we turn everything upside down and the statement of this author [Ferguson] that ‘the financial system is a reflection of human vice’ becomes correct, yet insufficient. (..) The bigger the financial leverage, the more risk has to be assumed and if there is nobody to control this issue, then sooner or later the bubble bursts and everyone suffers the consequences, including the banks themselves, though not all of them suffer the same because some eat up others and expand.

Then it becomes not only a financial, but also a political, or some other, failure. The ordinary people usually suffer the outcomes because their assets depreciate, the income they receive gets smaller and we say that all that happened due to a global crisis and there was nothing we could have done. In my view, we indeed could have done something,” the economist added.