ABSTRACT
The last few years have illustrated very clearly how ordinary people with only limited savings can lose them through unfortunate investment. No one wants to see such stories again. However, it is widely argued that New Zealanders save too little for their future and, when they do save, they appear to put a disproportionate amount in the housing market and less than most other developed countries in the equity market.2 It may well reduce the rate of return that people obtain on average but it may also slow the rate of growth of the economy. In this chapter, I address how the financial risks society faces can be better managed in the future and some of the more distressing losses avoided. My theme, therefore, is how to prepare for and manage future financial crises better. This implies that I regard the occasional occurrence of financial crises as inevit able and I explain why I think that is the case. There is also plenty we can do to reduce the chance of crises as well and I refer to that. However, to my mind, the important steps are to ensure that the costs of any crises that do occur are limited and manageable. Beyond a certain point, the costs of crisis avoidance may exceed that from manageable crises. The costs of crisis avoidance occur every year but the costs of crises themselves only materialize if there is indeed a crisis. Indeed such crises can actually be catalysts for change. That said, many countries clearly devoted too little resources to crisis avoidance this time around and, to some extent, we have been lucky on this occasion. New Zealand has fortunately not had to find out how well it could survive a more major shock. Countries such as the UK who thought they had an excellent setup, developed over more than a century, found they were very wrong. The worst crises affect everybody very noticeably but in many cases only part of the population really suffers – those who have invested in enterprises that fail, those who lose their jobs, those who have negative equity in their houses and have to sell them. Much of the cost may be hidden because it will fall on future taxpayers. If we look at the impact of the present crisis – for many countries, although significant, it is not out of line with some other downturns in the post war period. For some of the transition countries, declines in GDP by around 20 per cent, which would be truly shocking in advanced countries, are smaller than the declines they experienced 20 years ago and, where growth rates have been rapid, may have less damaging effects. For others, it is a major event. Countries
will therefore react differently. If they have got away lightly by comparison, the temptation to do little is much greater. Finland provides a lot of interesting evidence as a result of having had a financial crisis already in the early 1990s – one which had a worse impact on GDP than the Great Crash of 1929. It is relatively unlikely that Finland would have had the economic success of recent years without the crisis. Up till then Finland had experienced a continuing cycle of inflation and devaluation. Problems of limited competitiveness had been addressed by a steady expansion in the size of the public sector but the point of unsustainability had been reached. Deregulation was taking place, albeit rather reluctantly, and the likely outlook was a process of slower growth and slow attrition of public benefits as the fiscal arithmetic failed to add up. As it was, the enforced dramatic change from the crisis got the country back onto sustainability and made the unpleasant cuts in benefits and public spending politically acceptable as the alternative was worse. The political window for radical change to overcome longstanding problems tends not to be wide and it is easy not to take advantage of it. I am not of course advocating welcoming crises as a means of enabling rapid change but moderate crises can shake out the inefficient that otherwise persist through vested interests and give opportunities for the innovative. If one is unlucky enough to have a crisis, in my view, it is important to make it work for you, rather than simply cause enduring or irreparable harm, even if avoiding the crisis altogether would have been better. We have just such an opportunity now. People are shocked by how much what seemed to be a stable and beneficial financial system could suddenly collapse and harm them. Many of the necessary changes have already been made but the appetite for further action as the economy picks up is likely to shrink. My remarks are in two parts, first addressing how we might structure the financial system in order to reduce the impact and occurrence of crises and second how as individuals and enterprises it is possible to organize ourselves so as to reduce the impact should a crisis occur.
