Abstract
The predictability of financial crises is widely regarded as low. However, skills linked to market psychology (behavioral finance) and the understanding of history and macrofinancial aggregates have been insufficiently integrated in the forecasting and risk management of financial institutions. Traditional financial modeling can no longer be applied as nicely as in the past. In Sweden, the financial crises of the early 1990s and in the latter part of the past decade were caused by overconfidence, control illusion, and herd mentality—but also by shortcomings in management and corporate governance. There is no evidence that these two serious Swedish banking crises were not foreseeable. The general question is when and under which circumstances financial decision-makers and authorities should listen to the usual minority of warning voices. One conclusion is that economists should be more “in house-oriented,” and top managers should heed their professional opinions. Conclusions from this paper can also be drawn for China, India, and other emerging markets both when it comes to financial deregulation policy and government debt risks in deregulated financial markets.
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Notes
The Swedish krona was during this long period relatively closely and unilaterally fixed against the Deutschmark and a trade-weighted currency index—and then against the then-artificial European Currency Unit (ECU). These currency links were damaging in a period of (mostly) poor developments of the Swedish current account and the public budget.
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*Hubert Fromlet is a professor of international economics at Linnaeus University and Jonkoping International Business School in Sweden. His main interests and research areas are global economic and financial developments, behavioral finance, and emerging markets. Before re-joining academia, he served for 25 years as the chief economist at Swedbank where he introduced the purchasing manager index for Sweden in 1994. Fromlet was a member of the NABE board of directors in 2001–2003 and received the Abraham Scroll in 2001 for his Business Economics paper, “Behavioral Finance—Theory and Practical Application”. He received his Ph.D. from the University of Wurzburg, Wurzburg, Germany.
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Fromlet, H. Predictability of Financial Crises: Lessons from Sweden for Other Countries. Bus Econ 47, 262–272 (2012). https://doi.org/10.1057/be.2012.28
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DOI: https://doi.org/10.1057/be.2012.28