Institute for Financial Transparency

Shining a light on the opaque corners of finance


2007 Financial Crisis used to build an unfair world

In response to the Great Depression, FDR not only reformed the financial system, but with the New Deal built a fairer country.

In response to the Great Financial Crisis that began on August 9, 2007, a succession of Republican and Democratic administrations have effectively reversed his financial system reforms and made the country far less fair.

For a decade, I have been patiently explaining there are two models for how to respond to a financial crisis: the Japanese Model and the Swedish Model.

Under the Japanese Model, the banks and bankers are saved at all costs.  This is the response the EU, UK and US chose in 2008.

Unfortunately, this choice has never been successful at ending a financial crisis.  Instead, it transfers the burden of the excess debt in the financial system onto the real economy.  The predictable result is this burden swallows economic growth and, perhaps more importantly, creates a far less fair country.

After all, why should bankers who lent out more money than a borrower can afford to repay be protected from the consequences of their bad lending decision?  Why should borrowers have to suffer from having too much debt?  Isn’t it the responsibility of the banker to assess how much debt a borrower can afford and make sure they don’t lend more than this amount?

The decision to save the banks and bankers sends an unambiguous message about inequality and lack of fairness.

This is subsequently reinforced when the social programs that make a country fairer are rolled back under the argument the savings are needed for tax cuts to stimulate the economy.

Compare this to the Swedish Model under which the bankers write off all the excess debt the borrowers cannot afford to repay (this model actually originated in the US under FDR).  This protects the real economy and allows it to continue growing.

Equally importantly, it promotes a fairer country.  After all, the lender is held responsible for making a poor lending.  The economy continues to grow with a minimal amount of additional stimulus.  Social programs are not only maintained, but they can be enhanced.