When Finland Froze Over

Surviving the deepest financial crisis since the Great Depression

Issues discussed:

• Why Finland fell into the deepest financial crisis, since the Great Depression, in early 1990s.

• How the crisis was handled in Finland vs. in Japan.

• The double-lessons of Finnish experience: How to survive and strive from a financial collapse.

First I have to apologize my double-publishing of “Why are we on the verge”. I was cleaning my archives on Sunday and erroneously thought that I had not published this version. Well, these things happen and repetition is the source of all learning ;). Now to a new and timely historical topic.

It’s generally not well known that, in the early 1990s Finland experienced the deepest financial crisis and economic depression by any western country since the Great Depression of the 1930s. Because we are heading to the third wave of the Global Financial Crisis that started from Europe in late-September 2022, I think that Finnish experience will bring much needed understanding on the nature of financial crises, and how to fix them successfully.

The 1980's was an era of financial liberalization. After the collapse of the Bretton-Woods system in 1973, the pressure of relaxing the tight financial regulation had started to build. In Finland, this liberalization marked the final phase of a long economic boom that had started in the 1950's, during which Finland rose from a relative poor country to one of the richest economies in the OECD (Organization for Economic Co-operation and Development). Because of the obvious similarities with the rise of Japan, Finland was dubbed as the "Japan of the North".

Finland and Japan actually faced a financial crash at the same time. However, they applied different policies of handling the crisis, which led to widely differing outcomes. GDP of Finland fell by 14 percent in just three years, which made the Finnish depression the worst any country in the western world had seen since the Great Depression. However, Japan actually never recovered from the crisis, due to the extensive bailout operations. This is the biggest lesson and difference between the two crises. The comparison of these two crises shows that it is better to let the crisis to play out rooting out the bad actors than to bailout the banking sector.

Finland: From ashes to riches