Financial crisis, Lehman Brothers, bonuses, debt restructuring, investment banks

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 enormous consequences. If we take into account the economic policy stimulus measures carried out in Europe, the United States and elsewhere, the price of the crisis rose to more than 20 trillion dollars. The number is huge when you consider that the gross domestic product of the entire world in 2009 was 58 trillion dollars.

In practice, the crisis also had the effect that the states became heavily indebted due to the financial crisis rescue operation. Their public finances went sharply into the red. For example, the average budget deficit in the euro area before the crisis in 2007 was only 0.6 percent of gross domestic product, but in 2010 it was already 7 percent. In the same period, public debt rose from 66 percent to 84 percent of gross domestic product. Similarly, in the United States, when the Lehman Brothers investment bank collapsed in September 2008, it led to an increase in government debt by more than a third in the following 19 months. That means more than $10,000 in additional debt per resident.

But how can economic collapses be prevented and how should they be dealt with? Or how can the effects of the recession be reduced? Next, we will go through this area. For that purpose, I will present a few options that could prevent problems.

MEASURES FOR BANKS AND FINANCIAL INSTITUTIONS

As noted earlier, the financial crisis caused private troubled debts to be transferred onto the public, i.e., onto taxpayers. In practice, it meant indebtedness of the states, tax increases, millions of unemployed and the downsizing of the public finances, where they try to save on healthcare, education and social security. The financial crisis has weakened the position of millions of people.

In order to prevent the current crisis from recurring, it has been proposed, e.g. following solutions to prevent it. Many of them are the same ones that were resorted to as a result of the depression of the 1930s.

• Transferring supervision of the banking and financial sector away from the private sector and tightening its supervision. One reason for the banking crisis was that the rules and regulations that were enacted in the 1930s to protect the system from banking crises were dismantled one after another. This happened e.g. In the Icelandic banking crisis. It was because the big three banks were privatized and deregulated.

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?

Nothing of the kind. First, it's worth recalling the history that followed the start of US deregulation: the 1980s savings bank and junk loan bubbles and crises, the 1987 stock market crash, the Long-Term Capital Management derivatives fiasco, and the 1995-2000 technology stock bubble. If you include other countries that had similar deregulation experiments, you can add the bubbles and crashes of Iceland, Britain and several countries. So while the US 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 level of self-sufficiency must be made mandatory. This is the most important measure because almost all deep recessions in recent decades have started with banks and financial institutions becoming over-indebted. (The Finnish banking crisis more than 20 years ago, the Icelandic banking crisis, the financial crisis a few years ago...) For example, in the 19th century, the solvency of banks was often 20-25 percent, which enabled them to stay afloat even in difficult times. During crises, only banks whose liquidity remains high can survive.

On the other hand, during the financial crisis, the leverage ratio of the five largest US investment banks was over 30:1. It meant that if the value of their assets fell by just three percent, they would be bankrupt. 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 bailouts. The situation is illustrated by the fact that between 1980 and 2007, the debt of the financial sector almost quintupled in relation to the gross domestic product. The focus is often on the reckless spending of American consumers, but the real center of indebtedness has been the financial system.

• The same interest rate for all banks. One reason for the banking crisis has been competition with deposit rates. Before, all banks had the same interest rates, but when the law was changed in the 1980s in the USA and Finland, interest rate competition became possible. It turned banking into a game where ever greater risks began to be taken. As a result, e.g. the Finnish banking crisis at the turn of the 1980s and 1990s. In Finland, as a result of the banking crisis, tens of thousands of companies went bankrupt, a couple of hundred thousand new unemployed people were born, and the total costs rose to around FIM 50 billion (6-7 billion euros). That was a lot in a small country. All of this could have been avoided if the legislation had been kept as it was. Competition with interest rates should be prevented.

• Customers' income, ability to pay 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 are granted only when the debtor has first saved at least 10-20 percent of the price of the apartment. It is an indication that the loan will be repaid. It also reduces interest costs, because the loan amount remains smaller due to a larger savings share. For example, in the financial crisis a few years ago, it was essential that lenders gave loans regardless of the applicant's creditworthiness. They then routed the loans to Wall Street, where they were turned into increasingly complex securities and sold on. When homeowners defaulted on their loans, the value of the securities formed from the loans collapsed. That led to the bursting of the bubble.

A larger initial capital as a condition for obtaining a loan could also lower housing prices, which have been able to run away in many countries. For example, in the United States before the financial crisis, housing prices rose because millions of people were granted cheap, low-interest loans, and insufficient upfront savings were required. If large enough upfront savings had been required, it would certainly have kept housing prices lower due to reduced demand. On the other hand, the lower prices of apartments would have been and is the advantage that people will have more money for other consumption. It has a positive effect on society's economy.

• Banks must stick to basic banking, i.e. lending and deposits. They should be prohibited from insurance activities and from speculating with depositors' money and debt money in the stock and raw material markets. For example, the Glass-Steagall Act enacted in the United States in 1933 forbade the bank receiving the customer's deposits from guaranteeing or selling any kind of securities and set other restrictions on risk-taking. In this law, ordinary banks and investment banks were separated from each other - they were not allowed to operate under the same roof and not be connected to each other. When these proven laws began to be repealed in the 1980s and 1990s, it led to the banking system becoming indebted and collapsing. If a law were enacted that insurance institutions, ordinary banks and investment banks would each operate in their own sector, as was the case before, it would protect the financial market from instability. It would shrink and break up large financial institutions that have been deemed too big to fail. Only regular banks should have deposit protection, other financial institutions should have their own.

• Bonuses and reward systems in the financial sector and other sectors should be completely banned. They are also the main reason why the 2008 financial crisis occurred, and if this issue is not corrected, it is possible to drift into a similar or even worse crisis again. When brokers and sellers receive extra fees, bonuses and stock options for the contracts and loans they make, it encourages them to take big risks. This could be avoided by making all incentives illegal. A regular monthly salary should be enough for employees in the financial sector, just like for other employees.

The worst part is that those who caused the financial crisis received hundreds of millions of dollars in compensation while millions suffered for their greed. Therefore, it has been suggested that those who received bonuses would have to return the money they received. It's strange that you are rewarded for winnings, but you don't have 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 footing. It would remove gambling from the financial market.

What makes many derivatives problematic is that they are not transparent. It is difficult to be clear about their content and risk concentration. Also, no one knows who owns them and how much because most derivatives are sold outside of regulated markets (moving sales to exchanges would improve the situation). For example, Lehman Brothers' bankers explained to US government officials when they reviewed the bank's accounts: "We don't have the slightest idea about the details of our derivatives and the risks involved, and neither do you."

One form of derivative is also CDS (credit default swap), which means insurance taken out by the lender in case the borrower does not repay the debt. Any investor can also buy these derivatives, even if he does not own a single share of this company. It leads speculators to bet on corporate bankruptcies (something that could be avoided if CDS products were sold only to those who actually own the securities they are insuring.) with every incentive to ensure that this actually happens. In these cases, buying CDS has been likened to buying insurance on a house you don't actually own and then setting the house on fire.

In addition, if such derivatives are sold in large numbers, the insurer, i.e. the seller of the CDS, is responsible for an increasing number of claims for defaults. If a crisis comes, the insurer can quickly file for bankruptcy because it cannot survive all compensation claims. This kind of situation also arose in 2008 during the financial crisis. The world's largest insurance company was in possession of CDS derivatives, whose compensation claims became topical simultaneously. It neglected payments, and it caused a panic in the market:

This kind of situation triggered extreme and total panic in the financial markets. This is exactly why the US government had to bail out AIG (American International Group), which was the world's largest insurance company, when the financial crisis broke out.

AIG holds an estimated $1 trillion worth of CDCs. From the beginning of autumn 2008, it defaulted on only 14 billion CDS-related compensation claims, which was enough to completely shake the market. The US government had no choice but to bail out AIG to avoid a disastrous spiral of panic in the financial markets. Just five weeks after the US Treasury pumped in $85 billion to bail out the world's largest insurer, it had to increase the amount by $65 billion to a total of $150 billion. This makes it the most expensive single rescue operation in history. It is illustrative that 95 percent of all government subsidies received by AIG have gone to compensate for losses caused by the CDS market. (3)

• Correcting the classification will improve the situation in the securities market. If the classification is not in order, it gives a wrong idea about the reliability of the securities. That's what happened in the financial crisis of 2008, when rating agencies (there are three major private rating agencies in the US, Standard & Poor's, Moody's Investor Service, and Fitch Ratings) gave AAA ratings to securities when in reality they were worthless. This was part of the reason for the magnitude of the crisis. People bought securities that they thought were safe.

The fact that they earn money by advising banks and financial institutions on how their products could get the best possible rating also makes the operation of credit institutions problematic. It doesn't seem fair. Such consulting activities are carried out by classification societies and should be prohibited. These institutions should focus on only one task, which is the classification of debt instruments. Any other activity creates conflicts of interest.

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

• When banks and financial institutions have been saved from their own self-inflicted problems (the financial crisis in the USA in 2008 and the banking crisis in Finland more than 20 years ago), more compensation should be received after they have started to recover again. Although part of the damage caused by financial institutions has been recovered in monetary form, it does not match the trillions of dollars of damage they have caused in the form of, for example, unemployment and government indebtedness. It would be fair if they were obliged to pay longer-term compensation in the form of taxes. It could happen by taxing events in the financial world or the total income of the financial sector more.

It is illustrative of the matter that when the rise in food prices caused millions of people to starve in 2008, the governments committed themselves to creating a 22 billion emergency aid package for the world's starving people. In reality, this package eventually shrunk to 2.2 billion. Instead, the same governments spent 20 trillion dollars to save financial institutions, or almost 10,000 times more than to help the world's hungry.

• Taxation of monetary 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 caused by the fact that money could flow without any kind of obstacle to and from Asian countries. China, which restricted the movement of capital, was the only Asian country that was not ravaged by the crisis.

This type of crisis could be prevented by various foreign exchange taxes and restrictions as has been proposed. An example of supporting such an activity is the petition of a thousand economists before the meeting of the finance ministers of the G20 countries on April 13, 2011:

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

Even the well-known investor George Soros has been of the opinion that all financing should be taxed because it enjoys an unfair advantage over the rest of business. He stated in his speech at the Asia Society on 19 September 2001:

"Why is there a value added tax, but no 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 the price of food should be prohibited or restrictions such as high taxes should be placed on it. Such speculation has driven millions into starvation as food prices rise, or sudden collapses in commodity prices may have brought down entire agricultural sectors in developing countries.

Food bubbles have been created by the same investment banks, funds and investors who were behind the financial crisis. Quite soon after the financial crisis, more than 200 billion dollars were channeled into betting on food. It is estimated that as a result of speculation, the price of food can rise by up to tens of percent.

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

REDUCING INCOME DIFFERENCES is one of the best ways to increase the stability of society and get the economy on a healthy footing. This idea is based on the idea of the famous economist John Maynard Keynes that a relatively equal distribution of income is good for aggregate demand because the less well-off spend a large part of their income. Instead, the rich can use it for speculation or keep everything in savings, which measures are not useful for the economic development of the society. It is better to have a million people with an even distribution of income than to have the same number of poor and a few super-rich. An even distribution of income keeps the economy and demand on a healthy footing.

Keynes's ideas developed as a result of the Great Depression of the 1930s. Just before the depression, in 1928, income differences were really big, just as income differences in Western countries have grown even now. They are bigger than at any time since 1928.

There are different ways to reduce income differences. Here are some options that have been suggested:

Taxation that is more progressive than the current one is necessary to balance the economy. It means higher taxation than the current one for high and middle income earners. They have the opportunity to participate in it better than others. This model is according to 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 an exorbitant salary compared to ordinary laborers. They also receive bonuses, rewards, and huge severance payments that others don't get. Excessive wages should be tackled. Everyone should only be paid their normal monthly salary and no other fees. If, in addition to the monthly salary, additional bonuses are paid, they should be taxed with a heavy tax. This would increase equality in companies and make the working atmosphere better. The saved salary money could be used to hire more employees. The normal maximum monthly salary could be, for example, EUR 10 000. If it is paid more, there should then be an increase in progressive taxation.

The same pension for everyone. One of the problems of Western countries is that they get into debt and the money is not enough for education, health care, pensions and other social expenses. It is necessary to take measures to ensure that the ratio of income and expenditure remains balanced 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 should not be interfered with, but other pensions should be smaller 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 the fact that excessive pensions are unequal, they disproportionately increase society's expenses. Why should people be separated according to what kind of salary they have received in working life? Two different people can have similar careers behind them, and the lower-paid one may have done heavier work. Still, they receive different amounts of pension. A better and more equal solution would be for everyone to be paid the same amount of pension, which is enough for necessary expenses. It would greatly reduce the state's indebtedness, because clearly the largest amount of the state's social expenditure goes to pensions (e.g. in Finland approx. 40% of all social expenditure).

If we consider the situation in Finland alone, the average pension of a Finn is 1588 euros (Etelä-Suomen sanomat 5.9.2015). There are more than 1.5 million pensioners in Finland, of which a good 1.2 million are on old-age pensions and 232,000 on disability pensions. Widow's pension is paid to 258,000 Finns. In addition, a small group receives a part-time pension, a special agricultural pension or a child pension. It is also known that the number of pensioners is growing rapidly so that in 2060 every second Finn will already 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, e.g. 1300 euros per month instead of the current 1588. If everyone's pension were this 1,300 euros per month, there would be a saving in pension costs of more than 5 billion per year. On the other hand, if the income of low-income pensioners were to increase, it would reduce society's subsidies, which go to housing subsidies and medical expenses. It is of course true that it is difficult for rich pensioners to accept such changes, but in terms of the overall happiness of society and the future, an even distribution of income would be the best solution.

The higher than current taxation of property and capital income will even out wealth differences in society. The same applies to the taxation of real estate or landed property, especially if there are a lot of both.

For example, in the United States at the beginning of the 21st century, the richest percent already owned 40% of the wealth of the United States. It shows how wealth differences have grown. Taxes can eliminate these gaps in living standards.

In many developing countries, attempts have also been made to address the huge gaps in the standard of living in society. One example of this is land reforms, where poor people have been given plots of land from which they can get food and a decent living for themselves and their families. Such measures effectively reduce poverty and hunger.

The wages of ordinary workers should be such that they can get along well. In Western countries the salaries are certainly big enough, but in developing countries it is different. If everyone were paid a fair wage, it would reduce income differences 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.

Large multinational companies play a key role in wage development. Unfortunately, many of them have been blatant examples of maintaining inequality. They have not taken care of the conditions of the workers and have not paid a decent salary. Also, the working hours of the employees may have been long, up to 12-16 hours. Companies may operate in Western countries in completely different ways than in developing countries:

According to a general estimate, the living wage for an assembly line worker in China would be about 87 US cents an hour... A 1998 study of brand name manufacturing in China's SEZs 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 paltry 87 cents—some as low as 13 cents an hour.

The only explanation for how the rich and apparently law-abiding multinational companies have degenerate to the level of 19th century exploiters (and get caught every now and then) is related to the nature of the subcontracting system itself. The contract manufacturers, their subcontractors and the domestic workers working for the subcontractors conduct a bidding competition with each other at all stages, which pushes the price down, and a small profit share is deducted from the amount offered at each level. At the far end of this price pedaling chain, there is an employee (often three or four stages away from the company that placed the original order) holding a salary that has been reduced at every step. "When multinationals extort subcontractors, subcontractors in turn extort workers," explains a 1997 report on Nike and Reebok's Chinese shoe factories. (5)

Rent price regulation should come into effect. For example, Finland used to have a law that regulated the level of rents. When the law was changed, apartment rents have risen considerably in relation to other prices.

However, lower rents are one of the best ways to reduce income differences 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 economically efficient to support low-income people than to favor those who are already rich.

The same applies to housing prices. They often have too much air in relation to the construction costs or the fact that they are old apartments. Price regulation can influence the fact that prices would be more reasonable and people would have more money for other consumption.

The following article in the audience section (Arto Suninen, Helsingin sanomat 30.9.2015) 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 national economy is private consumption. Relatively the most significant part of it is spent on housing. This share is especially high among young people, students, unemployed, pensioners and low-wage earners living alone. Due to the high cost of housing, society has to support many groups.

The situation is made difficult by the fact that many have to get their rental apartments from private landlords. The yield from these apartments is now around 6-8 percent of the market price of the apartment. Prices have risen for several reasons, including as a result of monetary policy stimulus.

Returns are unreasonably hard in times when inflation is practically zero. The return on private rental apartments should be regulated to three percent by law. Lower rents would bring more purchasing power to those households that are most affected by other government measures. In addition, these households spend their earnings because there is no possibility for saving...

Price control is one way to reduce inequality in society. This applies especially to many developing countries. If the price of bread, basic foodstuffs and other general commodities are kept affordable, it helps the poor and keeps society more stable.

The right to tax deduction for mortgage interest should be made such that only first-time home buyers get it.

The goal of social policy should not be to make people happy, but to reduce unhappiness. In practice, it means that we mainly take care of those who are in real need of help and have no other income. For example, parents with a good income can do well without child benefits. Another option is that these subsidies are paid, but taxed so progressively that the subsidies for the rich remain small.

Debt arrangements can balance income differences and make the economy grow. It can happen both at the country level and at the private level:

Government debts. A good example of two different ways of acting towards the same state is how Germany was treated after the First and Second World Wars. Germany was in debt after both wars, but it was treated quite differently in different periods. The measures after the First World War led to economic collapse and social instability, but the aid measures after the Second World War (e.g. US Marshall Aid) and debt relief led to strong economic growth and social stability. Nearby states also benefited from it.

Germany is a good model of how debt arrangements can have a positive impact on society. Several other states are in the same situation nowadays. If they get debt relief and some of their debts are forgiven, it can prevent the rise of extremists and make the economy flourish.

The meaning of German war reparations is still debated. The dispute was started by John Maynard Keynes as early as 1919. Keynes was involved in the Versailles peace negotiations, but resigned from the British delegation in protest at the unreasonable demands. Soon after, Keynes published the pamphlet The economic Consequences of Peace (1919), in which he sharply criticized the Allies - and especially the French - thirst for revenge and fear of a new German rise. Keynes's main economic argument was that European political economy is interdependent. The World War was the "Civil War of Europe", and no one benefits from the fact that after the war one part of Europe is tried to be depressed economically. When Germany is forced to pay money to the victorious nations and export property and goods to them, the goods imported from Germany replace the domestic production of the Allies. On the other hand, an impoverished Germany is unable to buy Allied products. Allied domestic production and exports suffer, which is bad for everyone. Furthermore, Keynes predicted that war reparations would lead to (hyper)inflation in Germany, which indeed happened in 1923, when prices doubled every two days. Keynes also found it obvious that Germany's economic difficulties would have far-reaching and negative political consequences…

After the war, Germany became responsible again for its old debts. In addition, the reconstruction cost a lot. In addition to aid, Germany also received a loan. The country's total debt burden was again high, but by the beginning of the 1950s, the treatment had changed. The overall arrangement of Germany's debts was negotiated in London. The assessment of the debt burden and carrying capacity used as the basis for the negotiations was quite favorable for Germany. The debt burden was reduced to about half of the current value of the debts, which had already been calculated in Germany's favor, and no "structural adjustment conditions" were imposed on it. The payment terms were also very reasonable. At first, Germany only had to pay interest. 30 years were given to pay off the entire debt. Part of the debt was transferred to the period after German reunification. This debt arrangement made the economic miracle of the 1950s and 60s possible and contributed to the establishment of democracy in West Germany: Different choices in 1919 and 1953 therefore led to essentially different consequences. They give indications of what works and what doesn't, economically and politically. (6)

Personal debts, which are usually mortgages or debts caused by business bankruptcies, are another area where debt settlement is suitable. These people may have drifted into insolvency due to rising interest rates, unemployment, or because society's economic situation has weakened. That's what happened in Finland at the end of the 1980s and the beginning of the 1990s, when there was a severe economic depression.

The best way to help these people and also improve society's financial situation is to keep interest rates low and provide debt relief. It makes more sense to make easier payment plans than to bankrupt companies or keep people in perpetual debt prison. The more companies go bankrupt and the more private people fall into debt, the more unemployment increases and the economy goes into a downward spiral. It is better to support indebted companies and private individuals than to support the banks and financial institutions to which they are indebted. This keeps the wheels of the economy turning.

Paul Krugman, recipient of the 2008 Nobel Memorial Prize in Economics, has written on the subject:

And don't answer that agreements are sacred and that they are never renegotiated. The managed bankruptcy procedure, in which the amount of debts is reduced when they simply cannot be paid, is an established part of our economic system. It is common for companies to often be voluntarily placed into debt restructuring, during which they continue to operate but can renegotiate and reduce some of their liabilities…

So it could be useful if there was a way for troubled borrowers to get some relief and for lenders to be spared the costs of a forced auction. Other parties would also benefit. Empty apartments that have been secured by banks are a problem for their residential areas. Nationwide debt relief, on the other hand, would improve the macroeconomic situation. So it would seem that everything speaks in favor of the 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 consumption, unlike creditors. Debt relief would therefore increase consumption on the scale of the entire economy. (7)

When debt settlements are made, it is possible to do it in different ways, some of which are presented:

• Complete forgiveness of debts

• Partial debt forgiveness

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

• One option, especially in times of high interest rates, is to put a ceiling on what is repaid. It means that if the debtor has a loan of e.g. 100,000 euros, for which he pays both loan repayment and interest, a limit should be set on how much the total costs of the loan over 100,000 euros are allowed to rise with interest. Because if the interest rates are high (e.g. 10%), and the debtor has paid back e.g. 130,000 euros including interest, this amount should already be enough. It is unfair and unreasonable for the debtor to pay much more than the original loan amount. Therefore, the law should set a limit on how much the debtor has to pay in addition to the original loan amount. Perhaps a reasonable amount with interest would be 20-30% over the original loan amount. This would free many private people and companies from debt imprisonment and raise the economic condition of society.

A similar procedure can be applied to states. When the interest rates of some countries have become unreasonable (For example, Greece had an interest rate of more than 15% a few years ago. Many developing countries have been in the same interest cycle.), it would be fair to set a limit on what is paid back. The amount with interest can be e.g. the aforementioned 20-30% higher than the original loan amount. This would release the states from debt bondage and would be a reasonable compensation for the lenders.

Such a procedure would also be fair because many bystander states and their ordinary people 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 the interest that has been guaranteed by others.

• As stated, keeping interest rates low is one of the best ways to help debtors and keep the economy running. A low interest rate prevents corporate bankruptcies and private people's debt imprisonment.

This procedure should also be applied to quick-fix companies that charge an unreasonably high interest rate. 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 today is the indebtedness of states. It is caused by living beyond means and not taking care of the balance in terms of income and expenses. Let's leave to the future what should be put in order today. It is not taken into account that if the debt problem is not dealt with in time, it will be increasingly difficult to solve it later. The more you delay, the harder it is. US President Thomas Jefferson once stated how dangerous debt is:

“I place frugality among the first and foremost virtues, and national debt among the greatest dangers. In order to preserve our independence, we must not allow our rulers to burden us with continuous debt."

How should the debt problem be tackled? Several solutions have been proposed for this, but the following measures are probably the best:

First from the rich. As stated, it is important to keep the economy rolling. One of the best ways to do this is through equal income distribution, as suggested by the famous economist John Maynard Keynes. It is good for aggregate demand because the minority spend a large part of their income, but the rich can use it for speculation or keep a large part in savings, which measures are not useful for the economic development of the society.

Therefore, austerity measures should be aimed first at the rich and middle-income earners, because they can afford it, and because it has the least harm to the overall economy. There are several ways to do this, such as more progressive taxation or a pension of the same amount for everyone. Society's expenses should be reduced and it should start from the upper classes.

Risk of cuts. Many economists have warned that if a large number of people act quickly to reduce their debt – for example, when interest rates suddenly rise – it will have a damaging effect on the national economy. The reason is simple: Everything affects everything, and when a large number of people suddenly reduce their consumption, it affects the rest of the economy. The national economy is taking a dive because jobs are being lost due to reduced demand.

The same danger is in cuts in public spending and public sector jobs. Many countries want to quickly solve their debt problems and take big cuts, but this can lead to a ditch. It may push indebted countries deeper and deeper into recession and prevent their recovery. It can affect the reduction of total demand and the state loses even more tax revenue.

The IMF's structural adjustment program (sap) is one example of miserable programs. These programs have involved privatization, opening markets to foreign competition, and severe cuts in public services and job cuts. However, those countries that have followed the IMF's policy have invariably fallen into a deeper recession and their debt burden has increased. Greece is one example. Millions have become unemployed and marginalized in different countries because of IMF programs:

The IMF presented its first full-scale restructuring program in 1983. All the countries that applied for a large loan from the fund over the next two decades were told that they had to urgently restructure their economies. Davison Budhoo, the IMF's senior economist who designed the Latin American and African restructuring programs throughout the 1980s, later admitted that “everything we did from 1983 onward was based on our new ideology that the South could only be saved by 'privatization'. To this end, we shamefully brought about the chaos of the economies of Latin America and Africa in 1983-1988." (8)

Economist Paul Krugman continues on the same topic. He explains how a strong austerity policy can lead to a contraction of the economy and higher unemployment:

Fortunately, researchers at the International Monetary Fund have done this legwork, identifying as many as 173 cases of austerity in developed countries between 1978 and 2009. Their conclusion was that austerity policies were followed by economic contraction and higher unemployment.

There is still a lot more research to be done, but I hope this brief overview gives you an idea of what we know and how that information was obtained.

I especially hope that when you read me or Joseph Stiglitz or Christina Romer saying that cutting spending during this recession is only going to make it worse and that a temporary increase in spending could help us recover, you don't think, "Well, that's just his opinion."

In his recent speech on fiscal policy research, Romer asserted as follows:

“The evidence that fiscal policy matters is stronger than ever before – evidence that fiscal stimulus helps create jobs, and that reducing the budget deficit lowers growth, at least in the short term. And yet this evidence does not seem to reach the legislators."

We have to change this. (9)

MAINTENANCE OF EMPLOYMENT. When it comes to correcting the debt problem, it is important to maintain a high level of employment. The better the employment, the better the conditions are to keep the economy in order and reduce debts. On the other hand, if unemployment rises, it will reduce state tax revenues and opportunities to repair the economy. Employment can be maintained, for example, through the following factors:

Inflexibility and selfishness in labor market policy is one of the biggest reasons why unemployment is increasing and the economy is going in a worse direction. This is especially true in Western countries. When more is constantly demanded, companies cannot succeed. The result is an increase in unemployment and a decrease in tax revenues.

Let's take an example. The people of our time have regarded work 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. It is unreasonable when these days they are paid up to tenfold or a hundredfold 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:

Shortening working hours. The simplest ways to increase employment would be to shorten working hours. If the working time is shortened to e.g. 30 hours a week or a 4-day work week is made instead of 5, it will provide a job for tens of thousands of unemployed people. Many appreciate the increased free time and that the unemployed get work. Of course, the salary would decrease in such a model, but most people can get by even with lower incomes.

Dependence on the world economy. One of the biggest reasons for the recession and the increase in unemployment is dependence on the world economy. If things go badly elsewhere, it affects everywhere. The economy is starting to weaken because we are too dependent on other countries.

How to get rid of this addiction? One way can be protective tariffs and import quotas. Many transnational companies are against customs fees, but they can have a great impact on employment, especially in developing countries. They protect the countries' own production, which is not competitive compared to the production of large batches in industrialized countries. (On the other hand, if the Western countries removed customs duties on the craft products of developing countries, it would help developing countries rise out of poverty. Craft products have a great employment effect in them) For example, the IMF's programs, which have demanded the complete liberalization of trade to foreign competition, have been disastrous for these countries and their own production. The number of unemployed has increased by tens of millions as a result.

The same problem exists in the EU area. If we went back to the time when there were protective tariffs to protect our own production, it would enable the existence of more companies and increase employment in many countries. It would weaken large multinational companies, which often evade taxes through tax havens, but would strengthen countries' own production. Unemployment has increased in several countries since they joined free trade. Another problem for the EU is that the countries belonging to the monetary union can no longer rely on devaluation to improve their competitiveness. It limits the means of states to correct their economic situation.

All western industrialized countries have also resorted to protectionist measures themselves to protect their own production. There has hardly been complete free trade, only various intermediate forms. Even during the depression of the 1930s, many countries - including Hitler's Germany - began to follow protectionist economic policies to improve employment. It helped them get out of the slump.

The complete liberalization of world trade could indeed have a devastating effect on the employment and tax revenues of dozens of countries. It results in a few transnational corporations dominating the market (and the political leaders). Production is concentrated in increasingly larger units, where products are produced more and more efficiently, cheaply and with a smaller workforce. The managers of these companies do get very rich, but at the same time millions of new unemployed people are born. 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 stated, society's economy and employment are largely dependent on what happens elsewhere. If a country or city is economically connected to other states and regions, it will soon affect the entire economy and employment.

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

Still, more radical solutions have also been proposed, such as the establishment of a local currency (monetary transactions could be carried out in modern times only through telecommunication connections) and other solutions that support locality. Recessions and high unemployment are not automatic consequences of the global economy, but can be avoided with sensible measures. The goal does not have to be complete self-sufficiency of a village, municipality or city, but only relative self-sufficiency. Goods and services can be exchanged without being tied to a hard currency (e.g. euro).

Such a model could be useful, for example, in a society like Greece, where a large part of the euros goes to servicing the debt, and in areas where there is unemployment and a lot of people below the poverty line. Similarly, care for the elderly has been implemented in Japan through its own local currency. There, society saves considerably when people exchange services with each other. Both goods and services can be exchanged. Someone can fix cars, someone can sell fish, someone can take care of the elderly, someone can clean, etc. No kingdom needs to function only on one currency. Two monetary systems can operate side by side. Examples of the local economy are e.g. In Richard Douthwaite's book Short Circuit - Strengthening Local Economies for Security in an Unstable World. It tells about successful and unsuccessful examples of how the local economy can be implemented. Various energy solutions are also included.

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

In Douthwaite's opinion, it is essential that local resources are used primarily to satisfy local needs. The world market must not define what and how is produced in each location. The most central activities of local economies must therefore be built in such a way that they are able to operate solely with local resources, without production inputs bought with hard currency from outside each local economy.

According to Douthwaite, at least four different steps are needed to build this kind of local economy: establishing local money and local banks, and revitalizing local food and energy production.

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

... Since local money cannot be used outside of the local economy in question, a person must use the income he has acquired in the form of local money in the area of the same locality. Wealth or capital in the form of local money cannot therefore flow out of the local economy...

However, dozens of experiments carried out in different parts of the world have shown that the establishment of local currency units is a very effective way to revive local economies and reduce employment... For example, during the 1930s depression, local currency experiments carried out in various parts of Europe quickly increased local exchange so much that unemployment completely disappeared in the municipalities that carried out the experiments and in the urban area... If municipalities and village committees get the right to establish their own, local monetary units, they are already more than halfway on their way to full employment. (11)

With the right type of corporate taxation, employment can be improved. Companies that employ the most people in relation to their turnover and profits should be taxed more lightly. Instead, companies that employ few people in relation to their turnover and profits should be taxed more severely. It shouldn't be impossible to design taxation in such a way that labor-intensive companies get an advantage compared to low-employment ones. Above all, corporate profits should be taxed more, which have increased in many countries after the reduction of corporate taxes. On the other hand, tens of thousands of companies are in trouble and in debt nowadays. If taxation is lightened in labour-intensive sectors, it can keep them afloat. It is more difficult to start a new business than to maintain an existing business that may have temporary payment difficulties.

When taxation is aimed at rewarding labor-intensive companies, it also curbs layoffs. The stock market often rewards those companies that lay off their employees with Increase in the share price, but if their taxation rises at the same time due to the reduction of the workforce and increased profits, this curbs layoffs. Unfortunately, some companies make layoffs when they could very well keep their current employees.

Secondly, the legislation should be changed so that company managers do not get rich by firing employees. It's wrong if business leaders get big bonuses and rewards for rising stock prices, while at the same time laying off hundreds or thousands of workers. Personal greed enabled by the system can lead them to make such decisions. A simple monthly salary for all employees – starting with the managers – keeps away the pursuit of personal gain.

There are also other options for dismissing employees. These include a shortened work week or shortened working days. Such options should be considered first. From the point of view of society and people, it is better that the jobs remain.

State employment measures. States can also directly employ people. Before that, however, they should make sure they don't get into debt. No state can function in the long run if indebtedness cannot be brought under control. That's why taxes should be at a level that covers expenses. The taxation of the rich in particular should be tightened, because they can best afford it. However, many states in Western countries have done the opposite, i.e. reduced taxation of the wealthy, corporate taxation and employer contributions, all of which have improved the position of the rich and increased wealth differences.

In any case, when you want to improve employment, the state itself can be active in it. One example of this is US President Roosevelt's New Deal program. Within its framework, unemployment was reduced by programs financed by the state and which greatly increase employment, e.g. through the construction of roads and schools. It moved millions of Americans onto government payrolls. Although the program did not immediately lead to a full recovery of the economy, its long-term effects are estimated to be enormous.

One area where government measures or subsidies can be useful is the so-called green revitalization. It means that the state spends money on technologies or projects that improve energy efficiency (buildings, traffic planning and vehicle fuels), that reduce dependence on fossil fuels (oil heating, etc.) and energy imports, and lead to the use of renewable energies such as the sun, wood, straw, geothermal energy, animal manure, waste, hydropower and wind. Another important area is the recovery and utilization of waste heat. If it were made more efficient, it would produce huge savings. Such investments will soon flow back into the national economy. In addition, energy forms imported from abroad have at least three problems:

• Most imported fuels are fossil fuels, which means they are only available in limited quantities. In a few decades, for example, oil reserves will be significantly smaller 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 now.

Various calculations have been made about the effect of the green revival on the economy. It is difficult to assess how accurate these calculations are, but at least they contribute to an increase in jobs, an increase in energy efficiency and an increase in environmental friendliness. Those are good goals.

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

The authors of the report calculated that spending 100 billion dollars (72 billion euros) on these projects would create two million jobs in two years. Using the same amount of money for household consumption would instead create only 1.7 million and 0.6 million jobs for the oil industry...

One of the advantages of green recovery is that it offers the opportunity to get direct returns to the national economy in several 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 be less than two years. Some – but not all – of the returns from green revitalization investments fall directly into the state's coffers and can thus compensate for the burden of public investments on the public economy.

Direct benefits include savings on the government's own fuel costs, cost savings brought about by reduced health care expenses, reduced traffic jams and even 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 revitalization can also mean more accurate use of wastes and logging residues. It is estimated that tens of millions of cubic meters of logging waste are deposited in Finnish forests every year, which in terms of energy content corresponds to almost half of the amount of fossil fuel used in Finland. If logging waste could be put to good use and more wood used as energy, it would be of national economic importance. It would reduce energy imports (two-thirds of Finland's energy comes from abroad) and increase employment. The use of bioenergy in countries like Finland is certainly more efficient than, for example, the use of wind. It can be used to produce heat and electricity or fuels. Many other countries are in the same position. It would make more sense for them to use energy obtained from their own area for heat and electricity production rather than imported energy.

Our political decision-makers are often happy to emphasize that the forest project has been aimed at putting other forms of energy in a more favorable position by exempting it from taxes. However, according to Osmo Soininvaara, wood energy is actually taxed more heavily than any other form of energy. By far the largest part of the price of wood energy consists of the price of work. Human labor is taxed so harshly in Finland that the various taxes actually make up a clearly 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 line in terms of taxation, for example wood chips would be clearly more affordable than fossil fuels.

In Soininvaara's opinion, the absurdity of the situation is also increased by the fact that, with high unemployment prevailing, the unemployed, who could collect energy wood from the forest, twiddle their thumbs in frustration and become increasingly bitter. According to Soininvaara, the labor used to collect wood energy would be "almost a free commodity" from a national economic point of view...

Changing the taxation 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 employ many times more people for the same amount of energy than fossil fuels or nuclear power, and since relatively small subsidies would be enough to make the large-scale use of wood energy economically viable, this would also be a sensible use of money from the state's point of view... The annual... decrease in Finland from buying fossil fuels would decrease significantly and our climate-warming emissions would decrease. (13)

Improving energy efficiency. As stated, improving energy efficiency is one way to improve the country's economy. Especially for large and old properties, it is possible to reduce the heating costs by considerable amounts with fairly small solutions. Etelä-Suomen sanomat (ESS 27.8.2015: The government forgot about energy in its program) interviewed the CEO of Enegia Group about the matter. The article explained how to reach billions in savings. The most savings are made when heat is recovered from the ventilation of an old house by installing an exhaust air heat pump:

Enegia Group's CEO Tommi Vekka laments that the government program does not include energy efficiency measures. 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 the calculations of Veka, which leads Finland's largest energy management group, there is a possibility of savings of around 3.5 billion euros in Finland by improving the energy efficiency of buildings. The share of public buildings is roughly half of the amount... Every euro put into energy savings circulates manifold through the Finnish employment wheel, and the total savings are billions. I would be the very first to tackle this myself, Vekka enumerates.

In his stick-carrot-combination weather, at least the property tax for large buildings should be adjusted according to the energy class... Actions should be targeted especially at large properties and the existing building stock for the greatest impact.

- Building zero-energy houses is important, but it doesn't 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 the refund of real estate tax, when the deterioration of energy efficiency could be demonstrated. At the other end of the carrot is, of course, the shrinking of the property's operating costs.

References:

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