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Economy under analysis 



How can economic collapses be prevented and addressed? Read on for measures to prevent the worst from happening



When the Lehman Brothers investment bank collapsed in 2008 and the world faced a financial crisis, it had massive consequences. True cost of the crisis amounted to more than $ 20 trillion if we take into account the economic stimuli applied in Europe, the United States and elsewhere. The figure is huge considering that the world’s gross domestic product in 2009 was $ 58 trillion.

   Virtually, the crisis also contributed to the high indebtedness of governments, which resulted from the operations to save the financial crisis. The governments’ public finances became highly negative. For example, in the euro area, the average budget deficit before the crisis in 2007 was only 0.6% of GDP, but in 2010 it was already 7%. Public debt rose from 66% to 84% of GDP over the same period. Similarly, in the United States, when the Lehman Brothers investment bank collapsed in September 2008, it led to an increase in government debt of more than a third over the next 19 months. That means more than $ 10,000 in additional debt per inhabitant.

   But how can economic collapses be prevented and addressed? Or how can the effects of the recession be reduced? These topics will be discussed below. For that purpose, I will present a few options that could prevent problems.




As noted earlier, the financial crisis caused private troubled debts to be transferred onto the public, i.e., onto taxpayers. In practice, it meant governments running into debt, tax increases, millions becoming unemployed, and the downsizing of public finances in an attempt to save on health care, education, and welfare. The financial crisis made matters worse for millions of people.

   In order to prevent a recurrence of the current crisis, the following solutions, e.g., have been proposed. Many of them are the same ones people resorted to after the recession of the 1930s.


• Transfer of banking and financial supervision away from the private sector and strengthening of its supervision. One reason for the banking crisis was that one after another the rules and regulations laid down in the 1930s to protect the system from banking crises were dismantled. This is what happened, e.g., In the Icelandic banking crisis. This was due to the privatization and deregulation of three large banks.


But perhaps the housing bubble and financial crisis were tsunamis that struck only once in a millennium, one of random chaotic storms that cannot be predicted or managed? Or could they have been an epidemic of abuse that does not happen again now that everyone has learnt their lesson?

They were nothing of the kind. First, it is worth revisiting the events that took place after the start of deregulation in the United States: the savings bank -and junk bond bubbles crises of the 1980s, the stock market crash of 1987, the Long-Term Capital Management derivative fiasco, and the 1995-2000 technology stock bubble. If other countries with similar deregulation attempts are included, we can add bubbles and collapses from Iceland, Britain, and several countries to the list. So, while the U.S. housing bubble and financial crisis were worse than others, they were by no means isolated events. (1)


• The self-sufficiency of banks and financial institutions should be increased, and a higher equity ratio should be made mandatory. This is the most important measure, as almost all the deep recessions of recent decades have started from banks and financial institutions becoming over-indebted. (The banking crisis in Finland just over 20 years ago, the banking crisis in Iceland, the financial crisis a few years ago…) For example, in the 19th century, the solvency of banks was often 20-25 per cent, which allowed them to survive even in difficult times. During crises, only banks with high liquidity can survive.

   In contrast, during the financial crisis, the debt-equity ratio of the five largest U.S. investment banks was over 30: 1. That meant if the value of their assets were to fall by just three per cent, they would be bankrupt. Indeed, three of the banks, Bear Stearns, Lehman Brothers and Merrill Lynch, became insolvent as a result of the crisis. Only Goldman Sachs and Morgan Stanley survived thanks to federal rescue efforts. The situation is illustrated by the fact that between 1980 and 2007, the debt of the financial sector increased almost fivefold in relation to GDP. The focus is often on reckless splurging American consumers, but the real core of indebtedness has been the financial system.


• The same interest rate for all banks. One contributing factor for the banking crisis has been competition in deposit rates. Before, all banks had the same interest rates, but the changed law in the 1980s in the US and Finland, made competition in interest rates possible. It made banking a game where you began to take ever-increasing risks. It resulted, e.g., in the Finnish banking crisis at the turn of the 1980s and 1990s. Because of the banking crisis in Finland, tens of thousands of companies went bankrupt, two hundred thousand new unemployed were created and total costs rose to about FIM 50 billion (EUR 6-7 billion). It was a lot in a small country. All this could have been avoided if the legislation had been kept the same. Competition for interest rates should be prevented.


• Customers' income, solvency and collateral should be better checked. This simple principle seems to be forgotten time and time again. For example, mortgages should be changed so that they can be granted only when the debtor has first saved at least 10-20 percent of the price of the home. It is an indication that the loan will be repaid. It also reduces interest expenses as the loan amount remains smaller due to the higher savings ratio. For example, in the financial crisis a few years ago, it was typical for lenders to give loans regardless of the applicant's creditworthiness. The lenders then directed the loans to Wall Street, where they were converted into increasingly complex securities and resold. When homeowners did not sort out their loans, the value of the securities made up of the loans plummeted. It led to the bursting of the bubble.

   Higher initial capital as a condition for obtaining a loan could also lower house prices, which have gotten out of control in many countries. In the United States, for example, before the financial crisis, house prices rose because millions of people were granted cheap, low-interest loans and not large enough upfront savings were required. Had large enough upfront savings been required, it would certainly have kept house prices lower due to reduced demand. On the other hand, lower housing prices would have had, and have, the advantage that people will be left with more money for other consumption. It has a positive effect on the economy of society.


• Banks should adhere to basic banking, i.e., lending and deposits. They should be banned from insurance business and from gambling on depositors' money and debt money in the stock -and commodity markets. For example, the Glass-Steagall Act of 1933 in the United States prohibited the bank that received customers’ deposits from backing or selling any kind of securities and imposed other restrictions on risk-taking. This law distinguished between ordinary banks and investment banks – they were not allowed to operate under the same roof and were not connected to each other. When these well-tried laws began to be repealed in the 1980s and 1990s, it led to the indebtedness and collapse of the banking system. If a law was made for insurance companies, ordinary banks and investment banks to operate in their respective sectors, as had been the case before, it would protect financial markets from instability. It would downsize and fragment large financial institutions that have been considered too big to fail. Only ordinary banks should have deposit insurance, other financial institutions should survive on their own.


• Bonuses and reward schemes in the financial and non-financial sectors should be banned altogether. They are also the main reason for the financial crisis of 2008, and if this issue is not fixed, it is possible to drift again into a similar crisis, or even worse. When brokers and sellers receive extra commissions, bonuses, and stock options on their contracts and credits, it encourages high risk-taking. This could be avoided by making all incentives illegal. A regular monthly salary should suffice for financial workers, as well as other workers.

   The worst part is that those who caused the financial crisis received hundreds of millions of dollars in compensation while millions suffered from their greed. It has therefore been suggested that those who receive bonuses would have to return the money they received. It is strange that profits are rewarded, but there is no need to take responsibility for losses.


Obama has been similarly inactive with regard to financial sector fees at both the corporate and individual levels, despite action by governments in other countries. In 2009, the UK enacted a law on a 50 per cent tax on bank bonuses. In September 2009, Christine Lagard (then a French finance minister) and six other European finance ministers jointly published a letter in the Financial Times calling for strong measures from the G20 member countries to curb financial bonuses and that “the bonus culture must end”. Most G20 countries actually adopted bonus restrictions, such as mandatory bonus returns as a result of subsequent losses… in 2012, such returns were made in Europe, with top management of Barclays, Lloyds and several other European banks each having to repay millions of dollars in bonuses they had previously received. (2)


• When the financial crisis broke out in 2008, derivatives, financial weapons of mass destruction, played a major role. If they were banned, or at least most of them, the global economy would be on a much more stable ground. It would eliminate gambling from the financial markets.

   What makes several derivatives problematic is that they are not transparent. It is difficult to know their content and the risks involved. Nor does anyone know who owns them and how much, as most derivatives are sold outside regulated markets (transferring sales to stock exchanges would improve the situation). Lehman Brothers bankers, for example, explained to U.S. government officials as they looked at the bank's accounts: "We have no idea what the details of our derivatives are and the risks involved, just as you don’t."

   One form of derivative is also CDS (credit default swaps), which means insurance taken out by a lender in the event that the borrower does not repay a debt. These derivatives can also be purchased by any investor, even if he does not own any shares in this company. It leads speculators to bet on corporate bankruptcies (something that could be avoided if CDS products were only sold to those who actually own the securities they insured.) giving all the incentives to make sure that really happens. In these cases, buying a CDS has been compared to buying insurance for a house you do not actually own and then setting the house on fire.

   In addition, if such derivatives are sold in large quantities, the insurer, i.e., the seller of CDSs, will be liable for an increasing number of claims for default. If a crisis arises, the insurer can quickly file for bankruptcy because it will not survive all claims. A similar situation arose in 2008 during the financial crisis. The world’s largest insurance company held CDS derivatives, the claims of which became topical at the same time. It defaulted on payments and caused panic in the market:


A situation like this triggered an extreme and total panic in the financial markets. That’s why the U.S. government had to rescue AIG (American International Group), the world’s largest insurance company, when the financial crisis broke out.

AIG holds an estimated $ 1 trillion worth of CDCs. In early autumn 2008, it defaulted on only 14 billion CDS claims, which was enough to thoroughly shock the market. The U.S. government had no choice but to save AIG to avoid a devastating spiral of panic in the money markets. Just five weeks after the U.S. Department of the Treasury had pumped $ 85 billion to save the world’s largest insurance company, it had to increase the amount by $ 65 billion to a total of $ 150 billion. This makes it the most expensive single salvage operation in history. It is illustrative that 95% of all state aid received by AIG has been used to compensate for losses caused by the CDS market. (3)


• Fixing the rating system will improve the situation in the securities market. If the rating system is not in order, it gives a false impression about the reliability of the securities. This was the case during the 2008 financial crisis, when rating agencies (there are three major private rating agencies in the US, Standard & Poor’s, Moody’s Investor Service and Fitch Ratings) gave the securities an AAA rating, even though they were in fact worthless. This was part of the reason for the magnitude of the crisis. People bought securities they thought were trustworthy.

   Another problem for credit institutions is that they make money by advising banks and financial institutions on how to get the best possible rating for their products. It doesn't seem honest. Such consultancy activities are carried out by rating agencies and should be prohibited. These institutions should focus on only one function, which is rating debt instruments. Other types of activities create conflicts of interest.

   Another problem is that debt issuers, not debt investors, pay the rating. This differs from the original approach that rating agencies had before. It also creates conflicts of interest. Only investors should pay for the rating, not others.


• Once banks and financial institutions have been saved from their own problems (the financial crisis in the US in 2008 and the banking crisis in Finland just over 20 years ago), more compensation should be received once they have started to recover. Although some of the damage caused by financial institutions have been compensated in monetary forms, it does not correspond to the trillions of dollars in damage they have caused, for example, in the form of unemployment and government indebtedness. It would be fair to oblige them to pay longer-term compensation in the form of taxes. This could be done by taxing more finance world events or total financial sector income.

   The bottom line is that when rising food prices caused millions of people to starve in 2008, governments pledged to create a 22 billion emergency aid package for the world's hungry. In reality, this package eventually shrank to 2.2 billion. Instead, the same governments spent $ 20 trillion to save financial institutions, which is nearly 10,000 times more than to help the world’s hungry.


• Taxation of money transactions is one way to bring stability to the market. When unlimited amounts of money circulate freely on Earth, they create great instability. For example, the Asian crisis in the 1990s was due to the fact that money could flow in and out of Asian countries without any obstacles. China, which restricted the movement of capital, was the only Asian country not torn apart by the crisis.

   Crises of this type could be prevented by various currency taxes and restrictions as proposed. An example of supporting such an action is the appeal by a thousand economists before the meeting of G20 countries’ finance ministers on 13 April 2011:


The idea of ​​a tax has now matured. The financial crisis has shown us the dangers of unregulated financing, and the link between the financial sector and society has been broken. It is time to fix this link, and it is time for the financial sector to give something back to society. (4)


Even well-known investor George Soros has been of the opinion that all funding should be taxed because it enjoys an unfair advantage over other business. In a speech at Asia Society on 19 September 2001, he said:


"Why is there value added tax, but not a tax on financial transactions?"


There are different models of how currency taxes and other financial transactions taxes could be implemented:


• The currency exchange tax could normally be around 0.5 - 1%, but during the currency crisis it could rise to as much as tens of percentages.


• All fast money transfers should be heavily taxed as they cause instability and have no social benefits. If the ownership has lasted a year or more, the tax should be lower.


• Speculation on food prices should be banned or restricted, such as implementing high taxes. Such speculation has driven millions to famine as food prices have risen, or the sudden collapse in commodity prices may have plunged entire agricultural sectors in developing countries.

Food bubbles have been created by the same investment banks, funds and investors that were behind the financial crisis. Pretty soon after the financial crisis, more than $ 200 billion was channeled into food betting. It is estimated that as a result of speculation, the price of food could rise by as much as tens of percentages.


• One way is to tax money transactions in tax havens, for example, with a 20% tax. Many states lose huge amounts of tax revenue when companies and individuals transfer their income and profits to tax havens. It would be even better if all tax havens could be closed.


REDUCING INCOME GAP is one of the best ways to increase social stability and make the economy well-rooted. This idea is based on the idea of ​​the well-known economist John Maynard Keynes that a relatively even income distribution is good for aggregate demand because the disadvantaged consume a large portion of their income. Whereas the rich can use it to speculate or save it all, neither of which are beneficial to the economic development of society. It is better to have a million people with a steady income than to be equally poor with a few super rich people. An even income distribution keeps the economy and demand on a stable ground.

   Keynes’s ideas evolved as a result of the Great Recession of the 1930s. Just before the recession, in 1928, income disparities were really large, just as income disparities in the West have currently grown. They are larger than ever since 1928.

   There are various ways in which income disparities can be reduced. Here are some options that have been suggested:


More progressive taxation is essential for economic rebalancing. That means higher taxation for high- and middle-income earners. They have the opportunity to participate in taxation better than others. This model is in accordance with God's will:


- (2 Cor 8:13-15) For I mean not that other men be eased, and you burdened:

14 But by an equality, that now at this time your abundance may be a supply for their want, that their abundance also may be a supply for your want: that there may be equality:

15 As it is written, He that had gathered much had nothing over; and he that had gathered little had no lack.


Wage ceiling would be a useful solution. In many companies, managers receive unreasonable pay compared to ordinary workers. They also get bonuses, rewards, and huge severance pays that others do not. Extreme salaries should be addressed. Everyone should only be paid a normal monthly salary and no other fees. If additional bonuses and commissions are paid in addition to the monthly salary, they should be taxed with a strong tax. This would increase equality in companies and make the work atmosphere better. The saved wage money could be used to hire more workers.

   The normal maximum monthly salary could be, for example, 10,000 euros. If it is paid more, there should then be an increase in progressive taxation.


Equal pension for all. One problem of the Western countries is that they incur debts, and they do not seem to have enough money for education, health care, pensions, and other social costs. Measures must be taken to ensure that the revenue-expenditure ratio remains in balance and that indebtedness does not occur.

   One quick way is to reduce the size of pensions (others have also suggested raising the retirement age). Small pensions can be left as they are, but other pensions should be lower than at present. It would be even better if all pensions were the same size. Then people would be equal at retirement age.

   In addition to being unequal, excessive pensions unreasonably increase the costs to society. Why should people be differentiated according to what kind of salary they have received in working life? Two different people may have a similar career behind them, and the lower paid may have done the harder work. Still, they receive different amounts of pensions. A better and more equal solution would be for everyone to be paid an equal pension, which is enough to cover the necessary expenses. It would greatly reduce government indebtedness, as by far the largest amount of government social spending goes to pensions (e.g., in Finland, about 40% of all social spending).

   If we think about the situation only in Finland, then the average pension of a Finn is 1588 euros (Etelä-Suomen sanomat on 5 September 2015). There are more than 1.5 million pensioners in Finland, of whom just over 1.2 million are on old-age pensions and 232,000 on disability pensions. The widow's pension is paid to 258,000 Finns. In addition, a smaller number receive a part-time pension, an agricultural special pension or an orphan's pension. It is also known that the number of pensioners is growing rapidly, so that in 2060 every second Finn will be of retirement age.

   How should this problem be addressed? The only option is to reduce the pension amounts in time so that the pensions can be paid. It would be even better if everyone had the same pension, for example, EUR 1,300 a month instead of the current 1588. If everyone's pension were this EUR 1,300 a month, there would be savings in pension costs of more than 5 billion a year. On the other hand, if the income of low-income retirees were to increase, it would reduce society’s subsidies that go to housing benefits and medical expenses. It is true, of course, that it is difficult for rich retirees to accept such changes, but a balanced distribution of income would be the best solution for the overall happiness and future of society.


Higher taxation of property and capital income will even out wealth disparities in society. The same goes for real estate or land taxation, especially if there are a lot of both.

   For example, in the United States in the early 2000s, the richest percentage already owned 40% of U.S. wealth. It shows how wealth disparities have increased. Taxes can eliminate these living standards gaps.

   Many developing countries have also tried to address the huge disparities in living standards in society. One example of this are land reforms, where poor people are given plots of land from which they can get food and a decent living for themselves and their families. Such measures are effective in reducing poverty and hunger.


The wages of ordinary workers should be at a level that allows people to cope well. In the West, wages are certainly high enough, but in developing countries it is different. Paying everyone a reasonable wage would reduce income disparities and increase the overall well-being of society. Large companies can afford it:


- (Deut 24:14) You shall not oppress an hired servant that is poor and needy, whether he be of your brothers, or of your strangers that are in your land within your gates


- (James 5:1-5) Go to now, you rich men, weep and howl for your miseries that shall come on you.

2 Your riches are corrupted, and your garments are moth-eaten.

3 Your gold and silver is corroded; and the rust of them shall be a witness against you, and shall eat your flesh as it were fire. You have heaped treasure together for the last days.

4 Behold, the hire of the laborers who have reaped down your fields, which is of you kept back by fraud, cries: and the cries of them which have reaped are entered into the ears of the Lord of sabaoth.

5 You have lived in pleasure on the earth, and been wanton; you have nourished your hearts, as in a day of slaughter.


- (Mal 3:5) And I will come near to you to judgment; and I will be a swift witness against the sorcerers, and against the adulterers, and against false swearers, and against those that oppress the hireling in his wages, the widow, and the fatherless, and that turn aside the stranger from his right, and fear not me, said the LORD of hosts.


Multinational corporations play a key role in wage developments. Unfortunately, many of them have served as blatant examples of perpetuating inequality. They have not taken care of the conditions of the workers and have not paid a decent wage. Employees may also have worked long hours, up to 12-16 hours. Companies in Western countries may operate in very different ways than in developing countries:


It is generally estimated that the wage for a conveyor belt worker in China would be around 87 US cents per hour… A 1998 study on the manufacture of branded products in Chinese special economic fields found that Wal-Mart, Ralph Lauren, Ann Taylor, Esprit, Liz Claiborne, Kmart, Nike Adidas, J.C. Penney and Limited paid only a fraction of that lousy 87 cents - some as little as 13 cents an hour.

The only explanation for how rich and, by all accounts, law-abiding multinationals have managed to regress to the level of the exploiters of the 19th century (and are also constantly caught doing it) has to do with the nature of the subcontracting system itself. Contract manufacturers, their subcontractors and domestic workers working for subcontractors will, at all stages, tender to each other at a lower price and a small share of the profit will be deducted from the amount offered at each level. Far to the end of this price-dumping chain, then, the employee (often three or four intermediate distances away from the company that placed the original order) has in his hand a wage bill that has been cut at every step. “When multinationals strain subcontractors, subcontractors in turn strain workers,” explains the 1997 report on Nike and Reebok’s Chinese shoe factories. (5)


Rental price regulation should be enforced. For example, in Finland there used to be a law regulating the standard of rents. When the law was changed, housing rents have risen significantly relative to other prices.

   However, lower rents are one of the best ways to reduce income disparities in society and keep the economy running. When low-income people spend less money on rent, the remaining money usually goes to consumption. It is much more effective for the economy to support low-income people than to favor those who are already rich.

   The same goes for housing prices. They often have excessive gaps in relation to the cost of construction or the fact that the houses are old. Price regulation can help make prices more affordable and leave people with more money for other consumption.

   The following letter to the editor (Arto Suninen, Helsingin sanomat on 30 September 2015) refers to the same topic, i.e., the high cost of housing and rising rents. The high cost of housing reduces purchasing power and increases society's costs in the form of housing subsidies:


Sanctions Act for private landlords


The largest demand item in the Finnish economy is private consumption. Of this, the relatively most significant share is spent on housing. This proportion is particularly high among young people, students, the unemployed, pensioners and the low-paid living alone. Due to the high cost of housing, society has to support many groups.

The situation is complicated by the fact that many have to obtain their rental housing from private landlords. The return on these homes is now about 6-8 percent of the market price of the home. Prices have risen for a number of reasons, including as a result of the monetary stimulus.

Returns are unreasonably high in times of virtually zero inflation. The return on private rental housing should therefore be adjusted to 3% by means of sanctions. Lower rents will increase purchasing power in those households most affected by other government actions. In addition, these households consume their earnings because there is no room for saving…


Price control is one way of reducing inequality in society. This is especially true in many developing countries. Keeping the price of bread, staple foods, and other essential commodities affordable will help the poor and keep society more stable.


The right to deduct interest on mortgages should be made such that it is available only to first-time home buyers.


The aim of social policy should not be to make people happy, but to reduce accidents. In practice, this means taking care mainly of those who are in real need of assistance and have no other income. For example, well-income parents do well without child benefits. Another option is for these subsidies to be paid but taxed progressively enough to keep subsidies for the rich small.


Debt restructuring can balance income disparities and get the economy up and running. It can take place both on a country-by-country and private level:


Government debt. A good example of two different approaches to the same state is how Germany was treated after the First and Second World Wars. Germany was indebted after both wars, but it received quite different treatment at different times. Post-World War I measures led to economic collapse and social instability, but post-World War II relief efforts (including U.S. Marshall Aid) and debt relief led to strong economic growth as well as social stability. Nearby states also benefited.

   Germany is a good model for how debt restructuring can have a positive impact on society. Several other states are in the same situation today. If they receive debt relief and are forgiven for parts of their debts, it can prevent the rise of extremists and get the economy to prosper.


The importance of German war reparations is still disputed. The controversy was initiated by John Maynard Keynes as early as 1919. Keynes was involved in the Versailles peace talks but resigned from the British delegation in protest of the unreasonable demands. Soon Keynes published the pamphlet The Economic Consequences of Peace (1919), in which he sharply criticized the retaliation of the Allies – and especially the French – and the fear of a new rise in Germany. Keynes’s main economic argument was that there is interdependence in the European political economy. World War II was a “European Civil War”, and no one benefits from trying to suppress one part of Europe economically after the war. When Germany is forced to pay money to the winning states and export property and commodities to them, goods imported from Germany will replace the domestic production of the Allies. On the other hand, impoverished Germany will not be able to buy Allied products. Allied domestic production and exports suffer, which is a bad thing for everyone. In addition, Keynes predicted that war reparations would lead to (hyper) inflation in Germany, which was in 1923, when prices doubled every two days. Keynes also considered it clear that Germany's economic difficulties would have far-reaching and negative political consequences…

After the war, Germany was again held liable for its old debts. In addition, the reconstruction cost a lot. In addition to the aid, Germany also received a loan. The country’s overall debt burden was again high, but by the early 1950s, treatment had changed. The overall German debt settlement was negotiated in London. The assessment of the debt burden and carrying capacity made as a basis for the negotiations was quite favorable for Germany. The debt burden was reduced to about half of the current value of the debt, which had already been calculated in Germany's favor, and was not subject to any "structural adjustment conditions". The payment terms were also very reasonable. At first, Germany only had to pay interest. The entire debt was given 30 years to pay. Part of the debt was transferred to the post-German reunification period. This debt settlement contributed to the economic miracle of the 1950s and 60s and contributed to the consolidation of democracy in West Germany: Different choices in 1919 and 1953 thus led to fundamentally different consequences. They give clues as to what works and what doesn’t, economically and politically. (6)


Private debts, which are usually mortgage debts or debts resulting from the bankruptcy of entrepreneurs, is another area where debt mediation is suitable. These people may have become insolvent because of rising interest rates, unemployment, or because the economic situation in society has deteriorated. This was the case in Finland in the late 1980s and early 1990s, when there was a severe recession.

   The best way to help these people and also improve the economic situation of society is to keep interest rates low and provide debt relief. It makes more sense to make facilitated payment plans than to put companies in bankruptcy or people in permanent debt. The more companies go bankrupt and private people go into debt, the more unemployment rises, and the economy goes into a downward spiral. It is better to support indebted companies and individuals than the banks and financial institutions to which they are indebted. This keeps the wheels of the economy spinning.

   Paul Krugman, winner of the 2008 Nobel Memorial Prize in Economics, has written on the topic:


And don’t say that contracts are sacred and will never be renegotiated. Controlled bankruptcy proceedings, in which debts are reduced when they simply cannot be paid, are an established part of our economic system. It is common for companies to often be voluntarily placed in debt restructuring during which they continue their business but may renegotiate and reduce some of their liabilities…

It could therefore be useful to have a way in which debtors in difficulty would receive little relief and lenders would be spared the cost of a forced auction. Other parties would also benefit. Empty, bank-secured apartments are a nuisance in their residential areas. Nationwide, debt relief would in turn improve the macroeconomic situation. So, everyone would seem to be in favor of a debt relief program…

To return for a moment to my idea that not all debt is the same: debt relief would indeed reduce creditors ’claims at the same time and by the same amount as it would reduce debtors’ liabilities. Now, however, debtors are forced to reduce their spending unlike lenders. Debt relief would therefore increase consumption on an economic scale. (7)


When debt reconciliations are made, it is possible to implement it in different ways, a few of which are presented:


• Complete debt forgiveness


• Partial forgiveness of debts


• A mitigated payment plan in which the debt is repaid in smaller amounts at a time or the payment of the debt is temporarily suspended.


• One option, especially during high interest rates, is to put a ceiling on what is being repaid. This means that if, for example, a debtor has a loan of EUR 100 000, for which he pays both the loan installment and interest, a limit should be set on how much the total cost of the loan of more than EUR 100 000 may increase with interest. That is, if the interest is high (e.g., 10%) and the debtor has repaid e.g., EUR 130,000 including interest, this amount should already be enough. It is unfair and unreasonable for a debtor to pay much more than what the original loan amount has been. Therefore, a limit should be set by law on how much the debtor has to pay in addition to the original loan amount. Perhaps a reasonable amount would be with interest rates 20-30% above the original loan amount. This would free many individuals and businesses from debt captivity and raise the economic position of society.

   A similar procedure could be implemented in states. When interest rates in some countries have become unreasonable (e.g., Greece had an interest rate of more than 15% a few years ago. Many developing countries have been in the same interest rate spiral.), It would be fair to set a limit on what is repaid. The amount with interest may be, for example, the above-mentioned 20-30% higher than the original loan amount. This would get states out of debt captivity and would be a reasonable compensation for lenders.

   Such a procedure would also be fair because many foreign states and ordinary people from those states have had to pay the debts of Greece and other states that they have borrowed from financial institutions. These financial institutions can make huge profits from interest that has been guaranteed by others.


• As noted, keeping interest rates low is one of the best ways to help debtors and keep the economy going. Low interest rates prevent corporate bankruptcies and private debt.

   This procedure should also apply to instant whipping companies that charge exorbitant interest rates. The Bible warns against usury and considers it a great sin:


- (Ex 22:25) If you lend money to any of my people that is poor by you, you shall not be to him as an usurer, neither shall you lay on him usury.


- (Lev 25:35,36) And if your brother be waxen poor, and fallen in decay with you; then you shall relieve him: yes, though he be a stranger, or a sojourner; that he may live with you.

36 Take you no usury of him, or increase: but fear your God; that your brother may live with you.


- (Ezek 22:12) In you have they taken gifts to shed blood; you have taken usury and increase, and you have greedily gained of your neighbors by extortion, and have forgotten me, said the Lord GOD.


DEBT PROBLEMS AND CUTS. One of the problems of our time is government indebtedness. It is caused by living beyond resources and not maintaining a balance between revenue and expenditure. What should be put in order today is left for the future. This kind of thinking does not take into account that if the debt problem is not addressed in time, it will become increasingly difficult to resolve at a later stage. The more it is delayed, the harder it is to fix. U.S. President Thomas Jefferson once said how dangerous debt is:


“I place economy among the first and most important of virtues, and public debt as the greatest of dangers to be feared. To preserve our independence, we must not let our leaders load us with perpetual debt.”


How the debt problem should be addressed. Several solutions have been proposed, but the following measures are probably the best:


First from the rich. As stated, it is important to keep the economy running. One of the best ways to do this is an even income distribution, as suggested by renowned economist John Maynard Keynes. It is good for aggregate demand because the minorities consume a large portion of their income, but the rich can use it to speculate or keep a large portion of the savings, which measures are not beneficial to the economic development of society.

   Economy measures should therefore first target the rich and middle-income because they can afford it and because it is the least detrimental to the economy as a whole. There are several ways to do this, such as more progressive taxation or an equal pension for all. The costs to society should be reduced and it should start with the upper classes.


Risk of cost cuts. Many economists have warned that if a large group acts quickly to reduce its debt – for example, when interest rates rise suddenly – it will have a detrimental effect on the national economy. The reason is simple: Everything affects everything, and when a large number suddenly reduces their consumption, it affects the rest of the economy. The national economy plunges as jobs are lost due to reduced demand.

   The same danger lies in cuts in public spending and public sector jobs. Many states want to quickly resolve their debt problems and take major cuts, but that can lead to an even worse situation. It could drive indebted countries into an ever-deeper recession and prevent them from recovering. It can contribute to a decline in aggregate demand and the state losing even more tax revenue.

   The IMF's structural adjustment programs (SAP) serve as another example of a program that only makes matters worse. These programs have involved privatization, the opening of markets to foreign competition, and sharp cuts in public services and job losses. However, those countries that have followed the IMF's policy have invariably plunged into a deeper recession and their debt burden has increased. Greece is an example of this. Millions have become unemployed and marginalized in various countries as a result of IMF programs:


IMF presented its first full-scale program to change their structures in 1983. All countries that applied for a large loan from the fund over the next two decades were told that they needed to restructure their economies from top to toe. Davison Budhoo, a senior IMF economist who designed the restructuring programs for Latin America and Africa throughout the 1980s, later admitted that “everything we did since 1983 was based on our new ideology that the South could only be saved by ‘privatization’. To this end, we have shamefully created the turmoil of the Latin American and African economies of 1983-1988.” (8)


Economist Paul Krugman continues on the same subject. He explains how strong savings policies can lead to economic contraction and higher unemployment:


Fortunately, IMF researchers have done this base work and identified as many as 173 cases of savings policy in developed countries between 1978 and 2009. Their conclusion was that savings policies were followed by a contraction in the economy and higher unemployment.

There is much more research data, but I hope this brief overview will give you an idea of what we know and how that information was obtained.

In particular, I hope that when you read me, or Joseph Stiglitz, or Christina Romer say that cutting consumption during this recession will only make it worse and that temporarily increasing consumption could help us recover, you will not think, "Well, that's just his opinion."

   Romer recently stated in his speech on fiscal policy research:

   “Evidence that fiscal policy matters are stronger than ever – the evidence that a fiscal stimulus is helping to create more jobs and that reducing the budget deficit will reduce growth, at least in the short term. And yet this evidence does not seem to reach the legislators.”

   This is something we need to change. (9)


MAINTAINING EMPLOYMENT. When the debt problem is fixed, it is important to also maintain high employment. The better the employment, the better the conditions are for keeping the economy in order and for reducing debt. On the other hand, if unemployment increases, it will reduce state tax revenues and opportunities for economic recovery.

   Employment can be maintained, e.g., using the following factors:


Inflexibility and selfishness in labor market policies is one of the main reasons why unemployment is rising and the economy is deteriorating. This is especially true in Western countries. When more is constantly demanded, companies will not be able to succeed. The result is rising unemployment and declining tax revenues.


Let's take an example. The people of our time have regarded it as a curse that must be overcome with the least possible effort, in the shortest possible time, and should receive the greatest possible compensation. The way to achieve these goals is through demands…

So, what do we do when there are no more jobs? We do so little and want so much that no one can hire us. It is also not possible to buy our expensive goods abroad. How then will we solve our problem? At least not in such a way that we would repent of our pride before the Lord, ask for mercy, and be grateful for what we receive. Instead, we demand. We are demanding politicians to get us a job – that is their duty, after all. (10)


The previous situation is easy to solve if you want to. For example, the reasonable salary for managers would be only 2 to 3 times that of an ordinary worker. Tt is unreasonable when these days they are paid up to ten or a hundred times the salary. People should get their satisfaction from the work done, not from excessive wages.

   Similarly, labor market organizations representing ordinary workers should be content with less. The more is being demanded, the worse the situation. A better solution would be to work for a lower salary than for the company to go bankrupt.


- (Luke 3:12-14) Then came also publicans to be baptized, and said to him, Master, what shall we do?

13 And he said to them, Exact no more than that which is appointed you.

14 And the soldiers likewise demanded of him, saying, And what shall we do? And he said to them, Do violence to no man, neither accuse any falsely; and be content with your wages.


- (Prov 30:15) The horse leach has two daughters, crying, Give, give. There are three things that are never satisfied, yes, four things say not, It is enough:


Reduction of working hours. The simplest way to increase employment would be to reduce working hours. If working time is reduced to, for example, 30 hours a week or a 4-day working week instead of 5 days, it will provide employment for tens of thousands of unemployed people. Many appreciate increased leisure time and that the unemployed get a job. Of course, wages would fall in such a model, but most would cope with lower incomes.


Dependence on the world economy. One of the biggest reasons for the recession and rising unemployment is dependence on the world economy. If things go badly somewhere, it affects all places. The economy is starting to weaken because we are too dependent on other states.

   How can this dependence be overcome? One way could be with protective tariffs and import quotas. Many multinational companies oppose tariffs, but they could have a large employment impact, especially in developing countries. They protect countries ’own production, which is not competitive compared to the production of large batches in industrialized countries. (On the other hand, if Western countries abolished tariffs on developing countries' handicraft products, it would help developing countries out of poverty. Handicraft products have a major employment impact on them.) The number of unemployed has increased by tens of millions as a result.

   The same problem exists in the EU. If we went back to a time when there were protective tariffs to protect our own production, it would allow more companies to exist and increase employment in many countries. It would weaken large multinational corporations, which often evade taxes through tax havens, but strengthen countries ’own production. In several countries, unemployment has risen since they joined free trade. Another problem for the EU is that countries in the monetary union can no longer resort to devaluation to improve their competitiveness. It limits the means with which states could correct their economic situation.

   All Western industrialized countries have also resorted to protectionist measures themselves to protect their own production. Complete free trade has not occurred, only various intermediate forms. Even during the recession of the 1930s, many states – including Hitler’s Germany – began to pursue protectionist economic policies to improve employment. It helped them rise from the recession.

Indeed, full liberalization of world trade could have a devastating effect on employment and tax revenues in dozens of countries. It results in a few transnational corporations dominating the market (as well as political leaders). Production is concentrated in larger and larger units, where products are produced more efficiently, with cheaper and smaller labor. The leaders of these companies will be greatly enriched, but at the same time millions of new unemployed will be created. Among other things, Naomi Klein's books The Shock Doctrine: The Rise of Disaster Capitalism and No Logo, Taking Aim at the Brand Bullies, deal with the power of big businesses and the disadvantages of complete free trade.


Local economy. As has been said, the economy and employment of society depend to a large extent on what happens elsewhere. If a country or city has an economic connection with other states and regions, it will soon affect the whole economy and employment.

   One way to strive to improve the local economy is, of course, to buy products from the area where you happen to live. It will certainly increase employment in that area. For example, it has been calculated that at the national level, if every Finn spent 10 euros more per month on purchasing domestic products, it would mean an increase of 10,000 jobs per year.

   However, more radical solutions have also been proposed, such as the creation of local currency (money could now only be provided through telecommunications connections) and other solutions that support locality. Recessions and high unemployment are not automatic consequences of the global economy but can be avoided by sensible measures. The goal does not have to be complete self-sufficiency of a village, municipality, or a city, but only relative self-sufficiency. Goods and services can be exchanged without being pegged to a hard currency (e.g., the euro).

   Such a model could be useful, for example, in a society such as Greece, where a large proportion of the euro goes to debt management, as well as in areas with high levels of unemployment and a lot of people below the poverty line. Similarly, care for the elderly has been provided in Japan through its own local currency. In it, society saves a lot when people exchange services with each other. Both goods and services can be exchanged. Someone can repair cars, someone can sell fish, someone can take care of the elderly, someone can clean up, etc. No kingdom needs to operate on just one currency. Two monetary systems can operate in parallel. Examples of the local economy can be found, e.g., in Richard Douthwaite's book Short Circuit - Strengthening Local Economies for Security in an Unstable World. It provides successful and unsuccessful examples of how the local economy can be implemented. It also includes various energy solutions.


Perhaps the best and most thorough analysis to date of how local economic recovery could be possible in the modern, industrialized world is presented in Richard Douthwaite’s excellent Short Circuit.

Douthwaite believes it is essential that local resources be used primarily to meet local needs. The world market must not determine how and what is produced in each locality. The key activities of local economies must therefore be built in such a way that, if necessary, they are able to operate solely on the basis of local resources, without factor inputs purchased in hard currency from outside each local economy.

According to Douthwaite, building local economies like this requires at least four different steps: setting up local money and local banks, and reviving local food and energy production.

People need to have some way to exchange services and goods with each other, other than through hard currency. Otherwise, people who are unable to acquire enough hard currency will easily fall outside the local economies, as well as be excluded from the national and global economy…

… Since local currency cannot be used outside the local economy in question, a person must use the income he or she has earned in the form of local currency in the same location. Assets or capital in the form of local currency cannot therefore flow out of the local economy…

However, dozens of experiments around the world have shown that setting up local currencies is a very effective way to revitalize local economies and reduce employment… For example, in urban areas… If municipalities and village councils are given the right to set up their own local currency units, they are already more than halfway to full employment. (11)


The right kind of corporate taxation can improve employment. Companies that employ the most people in terms of turnover and profits should be taxed less heavily. Instead, companies that employ few people relative to their turnover and profits should be taxed more heavily. It should not be impossible to design taxation in such a way that labor-intensive companies gain an advantage over those with low employment. Above all, more corporate profits should be taxed, which in many countries has increased since the reduction in corporate taxes. On the other hand, tens of thousands of companies today are in trouble and in debt. If taxation is reduced in labor-intensive sectors, it can keep them upright. It is more difficult to start a new business than to keep an existing business up and running, which may have temporary payment difficulties.

   When taxation is directed at rewarding labor-intensive companies, it also curbs redundancies. Often, the stock market rewards those companies that lay off their employees with a price increase, but if their taxation rises at the same time due to a reduction in the workforce and increased profits, this curbs the layoffs. Unfortunately, some companies are laying off in a situation where they could very well retain their current employees.

   Secondly, the legislation should be amended so that company managers cannot get rich through redundancies. It is wrong for corporate executives to receive large bonuses and bonuses for a share price increase while at the same time laying off hundreds or thousands of employees. The personal greed that the system allows can make them make such decisions. A mere monthly salary for all employees – starting with managers – keeps out the pursuit of personal gain.

   There are other options for dismissing employees. These are a shortened working week or shortened working days. Such options should be considered first. It is better for society and for people that jobs remain.


State employment measures. States can also directly employ people. Before that, however, they should make sure they do not get into debt. No state can get ahead if indebtedness is not taken care of. Therefore, taxes should be at a level that covers expenses. Taxation of the rich in particular should be tightened, as they can best afford it. However, many states in the West have done the opposite, reducing tax on the wealthy, corporate taxation, and employer contributions, all of which have improved the position of the rich and widened wealth disparities.

   In any case, when it comes to improving employment, the state itself can be active. One example of this is US President Roosevelt’s New Deal program. Within its framework, unemployment was reduced through state-funded and high-employment-increasing programs, e.g., through the construction of roads and schools. It moved millions of Americans to state payrolls. Although the program did not immediately lead to a full economic recovery, its long-term impact is estimated to have been huge.

   One area where state measures or subsidies can be useful is the so-called green stimulus. This means that the state spends money on technologies or projects that improve energy efficiency (buildings, transport planning and vehicle fuels), reduce dependence on fossil fuels (oil heating, etc.) and energy imports, and lead to renewable energies such as solar, wood, straw, geothermal, animal manure, waste, hydropower and wind. Another important aspect is the recovery and utilization of waste heat. If it were made more efficient, it would generate massive savings. Such investments will soon flow back into the national economy. In addition, there are at least three problems with imported energy:


• Most imported fuels are fossil fuels, which means they are only available in limited quantities. In a few decades, for example, oil stocks will be much lower than they are today.

• Imported energy is unreliable. Crises can affect getting it.

• The third problem is price fluctuations. For example, the price of oil can vary greatly. Some years ago, it was almost twice as expensive as it is today.


Various calculations have been made on the impact of green stimulus on the economy. How accurate these calculations are is difficult to assess, but at least they contribute to job creation, energy efficiency growth and environmental friendliness. These are good goals.


A study by the Institute of Economics at the University of Massachusetts supports this view. It identified six main areas for investment: building repair, public transport / rail freight traffic, smart grid, wind power, solar power and next generation biofuels.

The authors of the report calculated that spending $ 100 billion (€ 72 billion) on these sites would create two million jobs in two years. Instead, spending the same amount on household consumption would create only 1.7 million jobs and 0.6 million jobs for the oil industry…

One of the benefits of green stimulus is that it offers the opportunity to generate direct returns for the national economy in a number of different forms. More obvious are the savings in fuel and other resources. A good example is improving the energy efficiency of residential buildings in a few simple ways. The payback period for such investments may only be less than two years. Some – though not all – returns on green stimulus investment go directly to the state and can thus offset the burden of public investment on public finances.

Direct revenues include savings in the state's own fuel costs, cost savings from reduced health care spending, reduced congestion, and lower pollution levels. Some of these costs can be priced, for example, by putting a price on carbon emissions. (12)


In countries like Finland, green stimulus can also mean more precise use of brushwood and logging waste. It is estimated that tens of millions of cubic meters of logging waste remain in Finnish forests every year, which accounts for almost half of the amount of fossil fuel used in Finland. If logging waste were recovered and wood was used more as an energy source, it would have economic significance. It would reduce energy imports (two thirds of Finland's energy comes from abroad) and increase employment. The use of bioenergy in countries such as Finland is certainly more efficient than, for example, the use of wind. It can produce heat and electricity or fuels. Many other countries are in the same position. It would make more sense for them to use energy from their own territory for heat and electricity production than use imported energy.


Our policy makers are often happy to emphasize that the forest project has sought to put other forms of energy in a more favorable position by exempting it from taxes. According to Osmo Soininvaara, however, wood energy is actually taxed more heavily than any other form of energy. The vast majority of the price of wood energy is made up of the price of labor. Human labor is taxed so severely in Finland that, in reality, various taxes make up a much larger part of the price of wood energy than, for example, the price of coal. Soininvaara states that if fossil fuels and wood energy were on the same starting point in terms of taxation, forest chips, for example, would be clearly cheaper than fossil fuels.

In Soininvaara's opinion, the absurdity of the situation is also increased by the fact that when high unemployment dominates, the unemployed, who could collect energy wood from the forest, rotate their thumbs in frustration and become more and more bitter. According to Soininvaara, the labor used to collect wood energy would be “almost a free commodity” from an economic point of view…

Changing the tax system would be the best way to improve the profitability of wood energy. Another option would be to support the production of wood energy with state funds. Since the collection, transport and use of wood energy employs many times more people per fossil fuel than nuclear fossil fuels or nuclear power, and as relatively small subsidies would be enough to make large-scale use of wood energy economically viable, this would also make sense for the state… The annual cost caused by the purchase of fossil fuels in Finland would be significantly reduced and our global warming emissions would be reduced. (13)


Improving energy efficiency. As noted, improving energy efficiency is one way to improve a country’s economy. Especially for large and old properties, it is possible to reduce significant heating costs with fairly small solutions. Etelä-Suomen sanomat (ESS, 27 August 2015: Government forgot energy tightness in its program) interviewed the CEO of Enegia Group regarding the matter. The article explained how to make billions in savings. The greatest savings are generated when heat is recovered from the ventilation of the old house by installing an exhaust air heat pump:


Tommi Vekka, CEO of Enegia Group, is amazed that the government program does not include energy efficiency bee. According to him, it would be a really fast way to improve the country's competitiveness and reduce Finland's dependence on imported energy.

According to Veka’s, the leader of Finland's largest energy management group, calculations Finland has the potential for savings of approximately EUR 3.5 billion by improving the energy efficiency of buildings. Public buildings account for roughly half of the amount… Every euro put into energy savings circulates manifold through the Finnish employment wheel, and the total savings are billions. Personally, I would take this on first, Vekka lists.

In his stick-carrot combination at least the property tax on large buildings should be adjusted according to the energy class… Actions should be targeted specifically at large properties and the existing building stock for maximum impact.

- Building zero-energy houses is important, but it will not solve our big problems. About 65 percent of the current building stock was built before 1990, Vekka reminds.

His program of measures would also include a real estate tax refund if there is proof of improved energy efficiency. At the other end of the carrot, of course, is the shrinking operating costs of the property.






1. Charles Ferguson: Rosvojen valtio (Predator Nation, Corporate Criminals, Political Corruption, and the Hijacking of America), p. 219

2. Charles Ferguson: Rosvojen valtio (Predator Nation, Corporate Criminals, Political Corruption, and the Hijacking of America), p. 306,307

3. Yrjö Kallinen, Juha Koivisto, Lauri Lahikainen, Antti Ronkainen: Kurssi kohti konkurssia, p. 148, kirjoittaja David McNally

4. Mika Rönkkö (toim.): Toisenlaisen maailman manifesti, p. 40

5. Naomi Klein: No Logo, tähtäimessä brändivaltiaat (No Logo – Taking Aim at the Brand Bullies), p. 198

6. Heikki Patomäki: Eurokriisin anatomia, p. 171, 166

7. Paul Krugman: Lopettakaa tämä lama nyt!, p. 143,144,165

8. Naomi Klein: Tuhokapitalismin nousu (The Shock Doctrine: the Rise of Disaster Capitalism), p. 201

9. Paul Krugman: Lopettakaa tämä lama nyt!, p. 259,260

10. Sven Reichmann: Vapauteen kutsutut (Kalla till frihet), p. 103,104

11. Risto Isomäki: Kohti vuotta 1929?, p. 228,230,235

12. Tim Jackson: Hyvinvointia ilman kasvua (Prosperity without growth. Economics for a finite planet), p. 133,139

13. Risto Isomäki: Kohti vuotta 1929?, p. 244,245



More on this topic:

What things do you need to pay attention to if you want to prevent the recession from coming or how to avoid the worst consequences of the recession? Read here

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Jesus is the way, the truth and the life





Grap to eternal life!


More on this topic:

What things do you need to pay attention to if you want to prevent the recession from coming or how to avoid the worst consequences of the recession? Read here

The book and society. Read how the Bible and the Christian faith have affected literacy, health care, and other positive ways. Many are blind to this fact

Can famine and poverty be eliminated? Hunger and poverty plague millions of people. Read about measures to fight hunger and poverty and help people

Impact of the Bible on economy. Wrong lifestyles increase society's unnecessary costs by millions of euros, but adherence to biblical principles reduces them

Finances and the Bible. What does the Bible say about the economy? Dozens of Bible passages relate to this important topic