For many years, I have been an advocate of going Swedish. In addition to a surplus of beautiful Scandinavian blondes, Sweden understands what to do in a financial crisis.  They do not rescue banks, they rescue the banking systems. They do not bailout creditors but instead, ensure credit can move freely through the economy. Lastly, they do not place the burden of failure on taxpayers, but rather leaves it where it belongs — with bond and equity holders.

The Washington Post discussed this truism last week in an article titled Five economic lessons from Sweden, the rock star of the recovery.

What were those five lessons?

1. Keep your fiscal house in order when times are good, so you will have more room to maneuver when things are bad.

Prior to the 2008-09 recession, the U.S.and Britain had budgets deficit equal to 3% of GDP. Sweden had a 3.6% surplus. Sweden’s gross debt is ~45% of its economy; the US is nearly 100%. This left the government with lots of flexibility to engage deficit spend when the economy hit a crisis.

2. Fiscal stimulus can be more effective when it is automatic.

Sweden’s response to the crisis was provide income, health care and other services to people who are unemployed. That prevented a paradox of thrift from making a minor redcession something much worse.

Their spending programs cushioned economic blows, and can be designed to taper off when the economy turns.

3. Use monetary policy aggressively

As aggressively as the Federal Reserve has responded to the financial crisis, the Swedish central bank was even more aggressive. The Riksbank lowered its target short-term interest rate nearly to zero, but it expanded the size of its balance sheet even more than the Fed did relative to the size of its economy. In the  summer 2009, the Riksbank balance sheet was more than 25% of GDP. The Fed, never got over 15%. And, Sweden was much faster to normalize their footing versus the Fed, who is still zero bound. Swedish central bank have already raised rates.

4. Keep the value of your currency flexible.

The Swedish krona was a helpful buffer against the economic downdraft of the past few years. It fell in value against both the dollar and the euro during the crisis, making Swedish exporters more competitive.

5. Bankers will always make blunders; just make sure they don’t doom the economy.

Swedish banks made mistakes, just like the rest of the world. But their losses were more manageable. And due to their crisis in the 1990s, where Sweden’s major banks were temporarily nationalized, Bankers were not cushioned from the consequences of their unwise decisions. They did not learn the ruinous lesson of privatized profits and socialized losses that US Bankers have turned into a motto.

The threat from Moral hazard

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Previously:
Time to Get Swedish (January 23rd, 2009)

We Should Have Gone Swedish . . . (September 22nd, 2010)

Source:
Five economic lessons from Sweden, the rock star of the recovery
Neil Irwin
Washington Post, June 24 2011
http://www.washingtonpost.com/business/economy/five-economic-lessons-from-sweden-the-rock-star-of-the-recovery/2011/06/21/AGyuJ3iH_story.html

Category: Bailouts, Credit, Really, really bad calls, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

15 Responses to “Go Swedish, part 47”

  1. crutcher says:

    Hope to see the Wall Street Journal follow the lead of the WP…

  2. The Swede says:

    There is one thing that is frequently overlooked when analyzing Sweden and the crisis. That is that around 70% of Swedish mortgages are variable rate. Obvioulsy, the ratecuts from our Central Bank gave us a very strong stimolous effect. Much greater than I think people around the world knows. What will happen now that the FED has successfully created inflation is that The Riksbank will have to increase rate aggressivly (their only target is price stability). Sweden wont look as good…

  3. Chief Tomahawk says:

    Off-topic (but gotta go)…

    For today’s “What are you reading?”:

    http://beta.news.yahoo.com/ap-impact-nrc-industry-rewrite-nuke-history-070132412.html

  4. Petey Wheatstraw says:

    “1. Keep your fiscal house in order when times are good, so you will have more room to maneuver when things are bad.”

    The Grasshopper and the Ant, as a global economics lesson.

    “2. Fiscal stimulus can be more effective when it is automatic.”

    And when it is applied where needed. Right now, it automatically goes to those who need it least — exactly where it will do the least good.

    “3. Use monetary policy aggressively”

    Greenspan used monetary policy aggressively.

    “4. Keep the value of your currency flexible.”

    Never assume that you can’t flex it to the breaking point. Honestly, does anyone see this changing any time in the near future?

    In 2010, the relative worth of $100.00 from 1900 is:

    $2,680.00 using the Consumer Price Index
    $2,280.00 using the GDP deflator
    $12,000.00 using the unskilled wage
    $19,300.00 using the Production Worker Compensation
    $17,500.00 using the nominal GDP per capita
    $71,300.00 using the relative share of GDP

    http://www.measuringworth.com/uscompare/result.php?use%5B%5D=DOLLAR&use%5B%5D=GDPDEFLATION&use%5B%5D=VCB&use%5B%5D=UNSKILLED&use%5B%5D=MANCOMP&use%5B%5D=NOMGDPCP&use%5B%5D=NOMINALGDP&year_source=1900&amount=100&year_result=2010

    “5. Bankers will always make blunders; just make sure they don’t doom the economy.”

    Also, make damn sure that “crimes” and “blunders” are not confused. Be sure that bankers who act criminally pay the financial costs (restitution, plus penalties, plus interest), as well as serve time in a “correctional” institution.

  5. as a aside, maybe, if we had ‘gone Swedish’, with our Educational System, We would have seen fit to ‘go Swedish’, even ‘Icelandic’, with these Insolvent financial intermediaries..(?)
    ~~
    Peje Emilsson, Sweden’s Education Voucher Pioneer
    Frontier Centre: When did the Swedish government first implement its system of school vouchers and why?

    Peje Emilsson: The decision was taken in 1992. The reason was to provide freedom of choice, letting parents and students pick a school of their choice.

    http://www.fcpp.org/publication.php/1071
    http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=Peje+Emilsson+Kunskapsskolan
    ~~~
    Petey,

    to your Point (1.)..

    http://www.umass.edu/aesop/content.php?n=0&i=1

  6. tagyoureit says:

    All that and Millencolin!

    http://millencolin.com/pennybridgeblog/

  7. FS says:

    3. “Their spending programs cushioned economic blows, and can be designed to taper off when the economy turns.”

    Barry, Barry, Barry…..

    Our social(ist) programs are never tapered, never ending and have given millions a sense of entitlement rather than “cushioned” hard times..

    You are right on 4 out of 5, so you’re off to a good start.

  8. Robespierre says:

    All you have to do to understand why the Swedish had a different approach is to look at their political system:
    Multiparty
    %80 voter turnout
    Citizens very active in politics
    Strong grass root organizations
    Strong unions

    Now US
    2 parties
    No voters turnout to speak off
    Citizens MIA on politics
    No strong unions

    A Swedish solution was never in the cards for the US (regardless of its merits) because of the way power is tilted to an all powerful oligarchy that dominates our government.

  9. royrogers says:

    Hard to disagree with any of the points made.

    But we do not have a swedish system in the US.
    And no will by those in power to change it.

  10. realgm says:

    The biggest lesson in the financial crisis is keep the banksters, the lobbyists and the big corp CEOs out of Washington DC.

    Unfortunately, this has a very slim chance of happening.

  11. ashpelham2 says:

    I think the handling of this economic crisis is probably the only enviable attribute of Sweden that we as Americans would want.

    Blondes? We got a lot of those here. I”m married to one. For better or worse……
    Skiing? Plenty of that to be found….
    Health care for citizens? Well…..maybe I missed one…..

  12. formerlawyer says:

    @ashpelham2 Says:
    Other benefits….

    1. Shorter work-week
    2. Longer vacations
    3. Paid matrimonial leave for one year for both parents
    4. Lower inequality of income distribution
    5. Better mass-transit
    6. Greater social mobility
    7. Higher average income
    7. Good beer and sauana’s…

  13. yoganmahew says:

    Er, yeah.

    You might want to look at the taxpayers money that was put into Securum and Retriva.

    You might also want to look at the price of housing and how people pay for it – 100% I/O, 100 year mortgages. Clamped down on recently, but probably too late.
    http://macrobusiness.com.au/2011/06/swedens-bubblicious-housing/

    It’s a good thing they are good at resolving banks, they’re really bad at sustainable property markets…

  14. DeDude says:

    You mean a government that actually do the peoples work. No way, that is called activist gobinment and we don’t want none of that here !!

  15. competitionguy says:

    Ahem. I think you all should take a closer look at Australia. Culturally more similar to the US, but yes, arguably more socialist. We also have better beaches than you and Sweden. Not quite the rockstar, but relative to your govt’s ‘dancing with the stars’, I’d say we’re the ‘so you think you can dance’ of govt responses to the crisis.