Lenihan: Challenge to market model of capitalism

FINANCE Minister Brian Lenihan told politicians from 30 countries the “market model of capitalism is now being challenged” across the world.

The reality is that the global economy was now in the grip of “its most serious crisis since the greatest depression of 1929”.

Mr Lenihan’s unscripted comments formed the basis of his keynote address to the Organisation for Security and Co-operation in Europe Parliamentary Assembly Economic conference in Dublin attended by more than 100 politicians from 30 countries.

The conference theme was The World Financial Crisis and its effects on the OSCE.

On that point, Mr Lenihan said the International Monetary Fund has made it clear that “unless we clean up the balance sheets of the banks we are not going to bring the economic crisis to an end”.

“If the banking system doesn’t function correctly then the economy won’t function correctly either,” he said.

Mr Lenihan acknowledged the world was slow to cotton on to what was happening.

But the collapse of Lehman Brothers in September was a “decisive moment” as the seriousness of the crisis suddenly hit home.

Back in the 1930s it was accepted that banks should pay the price for their excesses and many were allowed to go to the wall in the US and that lack of confidence in the banks spread.

It forced Britain to quit the “gold standard in 1931 and led to the formation of a national government”.

This current global crisis has moved at a faster pace, forcing central banks to pump billions into the system to keep them from going under.

“The International Monetary Fund has made it very clear we are not going to bring the financial crisis to an end unless we get the banks’ balance sheets back in order,” he said.

When the first cracks appeared in the US financial sector “many of us were told by our officials that this was specifically a US problem”.

But the speed of developments after the collapse of Lehman Brothers also caught the markets off guard and undermined confidence in the global banking sector.

It forced the Irish government to guarantee the Irish banks and for a time it looked to be out on a limb, he said.

The rest of the world quickly caught up and now have their own forms of bank guarantees in operation, he said.

The lessons of history show that in the end confidence has to be restored to the entire global banking sector and it was essential that this is done as speedily and as effectively as possible, he said.

In his script, the minister said: “It is clear the world economy and particularly the global financial system is in a period of profound change.”

“The international financial system and its regulation have been severely tested and clearly found wanting.

“We welcome the important initiatives under way at international level to address the gaps and weaknesses in financial regulation that have come to light,” Mr Lenihan said.