Learning from the crisis

2018 marks the 10^th anniversary of the Great Recession. As some European countries have only now started to recover, societies and politicians understandably want to forget the years of painful austerity and look to the future.

But have we learned enough to prevent another crisis? Do we know how our institutions failed us the first time around? And are we confident they are better protected now?

Times of crisis may not be ripe moments for learning, as politicians are necessarily in a ‘firefighting’ mode, trying to save the economy and their political careers. Yet as the economy finally stabilizes, a backward-looking mechanism shedding light on the institutional failures that paved the way to the collapse may benefit a society like Spain in a number of ways.

In our project we explored the comparative experience of six European countries; we found economic truth commissions offer the best shot at learning.

 

Economic truth commissions

Economic truth commissions are independent fact-finding bodies tasked to document patterns of institutional failures in the run-up to the crisis.

They are distinct from other fact-finding bodies. Parliamentary commissions of inquiry are guided by politicians who may lack the expertise to fully understand the technical aspects of a modern financial crisis. At the same time, their partisan and confrontational nature may discredit their contributions in the eyes of the citizenry; simply put, they are seen as ‘business as usual’.

In contrast, the independent commissioners who lead truth commissions have expertise in technical aspects (i.e. finance, auditing, academic). Importantly, by identifying patterns of institutional failure, they can offer useful policy recommendations to protect the system from a future crisis.

 

The international Experience

The 2008 crash in Iceland led to the collapse of 97% of the banking sector. A few days after the crash, the Prime Minister set up the first truth commission in Europe. After almost two years of intensive investigation, the commissioners released a comprehensive final report (9 volumes and 1,500 pages). By coupling new technologies with the testimonies of bankers and politicians, they managed to reconstruct patterns of institutional failures with remarkable accuracy.

The final report apportioned blame to the Icelandic banks, noting their reckless risk taking, and identified institutional flaws. Based on the findings of the report, the Icelandic parliament decided to prosecute the former PM; no other European country has taken this step. In addition, the report’s recommendations became the basis for comprehensive legislative reform to strengthen state institutions.

The final report was so successful that it became a best seller. Copies were sold in super-markets and quickly became popular gifts, with parents giving them to their children so they could avoid making the same mistakes in the future.

 

Benefits of a truth commission

But we are more concerned with the Spanish case. Can a truth commission benefit Spanish society?

First, truth commissions can reveal things ‘hidden’ from the public. Modern financial crises are both complex and technical, so only a few experts can get the full picture. Truth commissions have the capacity to shed light on the technical failures in a simplified and accessible narrative.

Second, the final report of a truth commission is an ‘official acknowledgment’ of state failures. The state’s mea culpa can be cathartic and, at the same time, mend the tattered relations of trust between state and society.

Third, an official narrative can curtail the rise of populist leaders who may want to ride the tide of popular discontent.  As Michael Ignatieff has pointed out, truth commissions ‘can reduce the number of permissible lies’ circulated in the public, thereby restraining the appeal of conspiracy theories or myths fueling populism and challenging democratic politics. For proof, we only need look at Iceland; it is one of the few countries where the crisis was not followed by the rise of populist parties.

Fourth, by identifying patterns of failures, independent commissioners can turn these into concrete policy recommendations. A good example is the Pecora Commission in the United States. Commissioner Fernando Pecora was tasked with investigating the causes of the 1929 Wall Street crash. The Commission’s recommendations became the backbone of the Glass-Steagall Act that protected the global financial system from another crisis for decades.

 

Looking back, moving forward

Although most economists and politicians endorse forward-looking policies tailored to help an economy recover from a crisis, backward-looking mechanisms, such as truth commissions can be beneficial. By investigating the causes of a crisis, they offer a ‘public acknowledgment’ of institutional flaws, and this has the potential to restore relations of trust between state and society. The effort to deal with the causes of a meltdown in transparent way may help to legitimize democratic politics and tame the appeal of populist leaders. Most significantly, they can convert past failures into lessons that, if heeded, could prevent a future crisis.

Many political elites have framed the economic crisis as an opportunity, one ‘too precious to waste’. A truth commission is the litmus test of such declarations: do they actual mean it or this simply another wasted opportunity to learn?