Jan F Qvigstad: Could the financial crisis have been avoided? Challenges to international cooperation and conflict Speech by Mr Jan F Qvigstad, Deputy Governor of Norges Bank (Central Bank of Norway), at a seminar on the financial crisis arranged by Prio, Oslo, 8 December 2009. *  *  *  What happened? Confidence between financial market participants collapsed in September last year following the Lehman Brothers bankruptcy. The price of credit jumped up both in money and bond markets. Equity prices declined, increasing the cost of raising new equity capital. The authorities worldwide responded by supplying substantial liquidity to banks and central bank key rates were reduced. In many countries, the authorities provided extraordinary loans or took over banks to maintain confidence in institutions and market activity. In some countries, the authorities have purchased securities to bring down long-term interest rates. Stimulus has also been provided through increased public sector demand and government budget deficits have grown to unprecedented levels in some countries. The reaction of households and businesses was to increase saving and private sector demand declined. Credit standards were tightened and risk premiums soared. The drop in demand rapidly translated into a contraction in trade and output. In spring 2009, world trade was around 20 per cent below the level prevailing one year earlier. In many countries, the total value of goods and services production (GDP) declined over several consecutive quarters. Countries that were heavily reliant on exports of manufactured goods were particularly hard hit.
Unemployment has increased sharply in countries not far from our own. Given the high levels of available resources, there are prospects of lower than normal interest rates among our main trading partners for some time ahead. There are now signs that the stimulus measures are reviving growth, but production is still lower than it was prior to the crisis. The challenge going forward will be to address the problem of rising unemployment and high government debt in many countries. Why did it happen? When the Queen of England visited the London School of Economics in November last year, she asked her host why no one had foreseen the financial crisis. In July this year, her question was answered by a panel of 33 prominent economists from British universities, government institutions and the business sector. The panel did not cite only a single cause, but a web of causation. An important factor behind the crisis can be found in global macroeconomic developments in the years preceding the crisis. In the 2000s, China made its grand entry into global trade with an attendant surge in production and income. This led to higher demand for inputs, and the prices of oil and other raw materials increased. On the other hand, global consumer price growth was pulled down by exports of cheap goods from China and other countries with low production costs. Interest rates were lowered in many countries to prevent very low inflation or deflation.