Financial Crisis or Recession?
I’ve noticed a tendency, particularly among younger people, to think about “financial crisis” as being interchangeable with “recessions.”
In the US, many people describe the 2008 recession as a “financial crisis” and have think that we needed to bail out the banks in order to save the economy. But in reality, the financial sector in the US is already too big, from a historical perspective, and is not adding as much real value to the economy as the people in that industry want us to believe. The “real” sector matters much more. In 2008, people were crushed by the housing bubble; for many, their home is their most valuable asset, and home prices plummeted. That is why households stopped spending and the U.S. went into recession. The decision of the government to bail out the banks was just one of many ways that the government could have stabilized the real economy.
Recently, I had a discussion with a acquaintance of mine regarding Sweden and their current economic and financial situation while comparing it to past pre-crash situation in the world.
He told me that Sweden’s private debt sector has the highest debt, in relation to GDP, in the world (or shared with Japan) — about 300% of their total GDP and credit growth is not stopping. Meanwhile, their currency SEK is at is lowest its been ever, according to some sources — and their welfare system is trying its best to keep up with the huge demand. There is also some political instability going on, and people are starting to lose trust in a system that has been taking good care of them for a long time. Some sources claim that 1 in 4 high school graduates needs to become teachers in order to meet the supply of people in our country. The Swedes also have an inadequate police force and are experiencing long waiting time at the hospital(despite people paying very high taxes), but the care itself is good.
He added that Nordea, one of Sweden’s largest banks, fled from Sweden to Finland a few years ago, before that the CEO expressed worries about their looming loan-bubble. I also read that they are in some sort of housing crisis.
All of this in a global economic boom.
If I were analyzing the Swedish economy, I would look at: real wages, trends around employment, GDP growth (and it’s distribution), growth in business fixed investment, labor productivity, the trade balance, core price stability, and interest rates. I (personally) wouldn’t worry as much about banks or about debt-to-GDP ratios.
If you are interested to know more, you could read through the IMF Article IV Consultation. The IMF diagnosis might not be the right one, but it contains lots of timely information to consider.
Cheers
