The extraordinary financial meltdown in 2008 and resulting recession demonstrated that in an age of economic and financial globalization, the design of public policy played a critical role in the events. Poor public policy created the conditions for the crisis, while good public policy shaped the exceptional actions to deal with it.
A new book published by The Conference Board of Canada, Crisis and Intervention: Lessons from the Financial Meltdown and Recession, outlines 10 lessons for business leaders and policy-makers to address as the crisis recedes. The Hon. John Manley provides the book’s Foreword.
“Economic actors at all levels should be learning key lessons from this unique episode. When the good times return—and they will—we need to have taken steps to avoid repeating crucial mistakes. The worst of the recession and financial crisis is over. What is not over, however, is the need to adapt—in how we act and organize ourselves to avoid the worst impacts of the next financial crisis,” said Glen Hodgson, Senior Vice-President and Chief Economist, and editor of the book.
Members of The Conference Board of Canada’s Forecasting and Analysis team developed the individual lessons. They include:
· Canada’s fiscal stimulus spending, along with record-low interest rates, helped to overcome the worst of the recession and to kick-start the economy.
· The recession only delayed the inevitable workforce shortages. A mass exodus of baby boomers will force employers to compete even more fiercely for skilled workers, and put pressure on policy-makers to reform labour market and immigration policies.
· The financial sector is unique—because it interacts with all other players in the economy—and it must be treated differently than other industries through regulation and greater transparency.
· Public sector financial institutions are a critical backstop to provide credit when private lending dries up, but they must exist before a crisis hits—it is too late for governments to create them in an emergency. Canada had public sector financial institutions—specifically Export Development Canada and Business Development Bank of Canada—in place, and they provided exceptional support during the crisis.
· Policy coordination among global bodies, such as the International Monetary Fund, World Bank, and G-20 helped to bring the world economy out of the crisis. As the global economy returns to growth, there is a risk that this coordination will weaken.
· Firms can be “too big to fail”—with catastrophic costs to an economy. As a consequence, it is in the public interest to limit the systemic risk posed by very large firms in advance of any crisis.
· International trade links pulled countries into a wider and deeper recession than would have otherwise been the case, but these same connections may have blunted governments’ impulses to enact protectionist measures. These links can help the Canadian and global economies to revive coming out of the recession.
· Local governments do not have the fiscal powers and muscle to help pull their regions out of a recession.
· Policy-makers must enact fiscal and monetary policy change early in a recession, because consumer and investor psychology was a crucial factor in speeding the downturn.
· Governments must begin implementing the tough but necessary measures to get their deficits and debt under control.