Over these past few years of watching Banks collapse, get bailed out, and then falter again, I have had a consistent take on the matter: The banking system is more important than any single institution; If you as a banker are so incompetent as to blow up yourself and your firm, you should not be saved; instead, prepackaged bankruptcy, a/k/a temporary nationalization, is the preferred route to protect the overall system.

The choices are stark: Emulate either Japan or Sweden. In the US, we have a hybrid (Perhaps we should call it Swedenese or Jaden).

The Swedish approach — Save the System! –is embodied in the FDIC, which has real dollars at risk as the insurer of depository accounts. They follow the Swedish model in that banks they determine to be insolvent are to be liquidated and or sold off top the highest qualified bidder.

The Japanese approach — Save the Banks! — is a result of their Keiretsu, and is the model embraced first by the Bush White House, and the Federal Reserve, than by Congress, and lastly by the Obama White House. I have argued this approach is in large part why the post-crisis economy has been so moribund, with sub-par GDP and Employment the rule.

This policy-making error is based on a refusal to take the loss. Indeed, Capitalism recognizes that failure is normal, and denying that, rejecting a fundamental premise of market based economies equals embracing socialized losses caused by the reckless. The approach of Socialism for bankers, Capitalism for everyone else is a philosophy that Keynes, Hayek and Friedman would all heartily reject en masse.

As the error or our (and the Japanese) ways becomes increasingly obvious to fair-minded observers, the Swedish approach continues to find new adherents. The latest is this piece in Bloomberg Business Week:

“Sweden’s bank rescue model has protected taxpayers, turned a profit and left the Nordic country less indebted than when the financial crisis started in 2007.

It’s the opposite of what’s happening in the U.K., where the government’s debt burden has doubled in the past four years and taxpayers are still footing the bill to bail out banks . . .

As lenders across the globe resist stricter regulatory controls they say will hurt earnings, Sweden’s commitment to enforcing rigorous standards has paid off. Companies like Stockholm-based Nordea Bank AB (NDA) are better capitalized than most of their European and U.S. rivals, and have better access to funding markets and a lower risk of default. Tougher controls enacted during the Swedish banking crisis of the 1990s also have protected the state budget, which will be in surplus this year.”

We are presented with a stark simple choice when confronted with a financial collapse. We can save the system or we can save individual banks. Astonishingly, we keep choosing wrongly . . .

>

Previously:
Lessons from Sweden (March 11th, 2009)
We Should Have Gone Swedish . . . (September 22nd, 2010)
Go Swedish, part 47 (June 28th, 2011)

Source:
Sweden’s Tough Love of Banks is World Model
Johan Carlstrom
Bloomberg, Nov 9, 2011 
http://www.bloomberg.com/news/2011-11-09/sweden-prime-minister-proving-tough-love-of-banks-a-model-for-debt-crisis.html

Category: Bailouts, 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.

30 Responses to “Once Again, Its Sweden (Sweden!) Showing the Way”

  1. golfer says:

    So the real question to be answered appears to be, why do the decision makers “keep choosing wrongly?”

    My suggestion is to “follow the money.”

  2. PrahaPartizan says:

    In our quest to avoid becoming a democratic socialist society a la Sweden, we’ve managed to avoid being either democratic or socialist. The problems which we are experiencing can be laid directly at the the door labeled “Crony Capitalism” (or “Bourbon Democracy” since that venerable institution suffered the same results during its dying years). Those who have the ear of the monarch (be they king, emperor or President) and can plead special favors get bailed out. Everybody else suffers. What is particularly galling is the way in which the spiels about our practicing free market capitalism gets stuffed down our throats by pompous gasbags while the favored few get saved.

  3. ToNYC says:

    So like Churchill said and remains to be true, we Americans will try most every expedient before we finally are forced to do the right thing.

  4. BusSchDean says:

    A source of real frustration for any university professor, the student who makes the same mistake over and over again does so not because he/she is unable to grasp the material but rather because they simply refuse to learn.

  5. paulie46 says:

    Keep hammering Barry. The more credible voices out there stating what should be obvious the better chance the message will get through.

    If not, we are doomed.

  6. Moss says:

    They choose as they do because they are beholden to the bankers, they fear deflation, they can print money, the top percent would be harmed the most, it protects and propagates the status quo, they have been corrupted by campaign finance rules, regulatory capture, and the lobbying machine and they believe that the stock market is the real economy.

  7. dead hobo says:

    This whole Europe blowing up if the PIGS fail is starting to confuse me. I’m starting to wonder, again, if this is just a big scare intended to terrify all of us into another bailout for big money.

    Textbook international economics states that when countries fail due to too much debt, some of the debt gets written off, the currency devalues, and the country undergoes fiscal reforms. Writing off the debt appears to be the most terrifying aspect of current events. I’m at a loss to understand how that crushes the world providing central banks provide enough liquidity to get Europe over the hump. But wait, all 4 world central banks have already agreed to provide unlimited liquidity to prevent liquidity based economic crashes from occurring. So, there goes that issue. Sorry banks … you fucked up.

    Next comes currency devaluation. Instead of devaluing the lira, we devalue the euro. OK. Sorry France and Germany but you asked for this when you agreed to form a currency union. Bad call. Not my problem. Don’t worry. As your currency devalues your exports will become more attractively priced and your countries will be cheap to visit. Just like the textbooks say.

    Then comes fiscal reform. That’s not my problem. If you want to borrow money and nobody is stupid enough to think CDO insurance is a good idea (really, it’s a stupid idea, ask my why) then you need the ability to repay before anyone will trust you. The choice is to live in squalor or change your ways. Your decision, not mine.

    2008 hurt a lot because liquidity suffered, causing loans for working capital to disappear. This was a major part of economic failure. I don’t think this will be anywhere as big of a problem this time around. We’ve been schooled in how to handle this kind of economic disaster.

  8. Winston Munn says:

    I think the whole problem is we don’t have a catchy-sounding phrase that fits well into a sound byte. After all, as exceptional Americans we are too advanced to follow the lead of a country whose most well-known contribution was to provide a wife for Tiger Woods.

    Perhaps if we called it the ABBA DABBA DOO method it would fit well enough on a bumper sticker to be adopted. ABBA for the Swedish influence, DABBA for going Flintstone on their ass, and DOO for the results the banks have produced.

  9. dead hobo says:

    Winston Munn Says:
    November 10th, 2011 at 8:31 am

    I think the whole problem is we don’t have a catchy-sounding phrase that fits well into a sound byte.

    reply:
    ———–
    How about “Italy has gone all bunga bunga on Europe.Now France has the clap.” No, that’s more of an analogy and not a clever catch phrase. Sorry.

  10. Greg0658 says:

    pondering the concept markets need balance and everyone can’t run to the same side of the ship .. does that fit into the discussion ie: it works for Sweden because there is a counterbalance … so be 1st? 2nd 3rd but not last

  11. Jim67545 says:

    I can buy into the concept of let them fail. One would assume that it would make the rest of the herd more careful. My experience would suggest that it does not materially (unless regulation forces them) but it’s a comforting assumption.

    I do not understand the foundation for your statement that bailing out the banks has “in large part” contributed to the stagnant economy and UNemployment we now are experiencing. If the economy/citizenry were now paying for this in the form of taxes, I could understand the decelerating effect. But we have not really begun to pay for this.

    Would you also maintain that bailing out the auto companies, or mortgagors, has had the same contributory effect? Can you explain or provide a link to where you lay out the objective facts for “in large part?”

  12. ComradeAnon says:

    I imagine they don’t have lobbyists either. Or a Wall Street.

  13. gordo365 says:

    dead hobo – aren’t all the big banks in Europe all leveraged 30-1? A small “loss” from a little PIIGy is enough to start a chain reaction of lossess and write downs that bring them all down. Maybe.

  14. super_trooper says:

    1. Comparing Sweden in 1992 to UK today is naiive. Yes, the Swedish way to deal with banks is prefered. However, a strong world economy in the 90′s managed to pull export focused Sweden out of the (previous) great recession by the end of 90′s. We don’t have a strong world economy today and that makes it much harder for the UK to export their way out of the recession. (+ Sweden devalued their currency by 20%),

    2. Several Swedish banks, especially Sweband and Nordea should have been declaired bankrupt in 2008. Again it was irresponsible lending. This time to the baltic states. In contrast, Handelsbanken has been very solid for the last 30+ years. The culture at certain banks never change. Swebank (Sparbanken back in 1992) and Nordea (previously Nordbanken) were the worst offenders in 1992.

    3. The biggest error in the Swedish model back in 1992 was to NOT get rid of the upper management at these two banks. A change in corporate culture was needed.

  15. eliz says:

    Keep in mind….

    SWEDEN: Proportional Representation with Many Political Parties

    Swedish Social Democratic Party
    Moderate Party
    Green Party
    Liberal People’s Party
    Centre Party
    Sweden Democrats
    Pirate Party
    Christian Democrats
    Left Party

    If the U.S. had PROPORTIONAL REPRESENTATION, and many political parties, both our political and economic landscapes would look different — and better for the 99%.

  16. DeDude says:

    Sad that when the rubber hits the road or the sh.. hits the fan, we are more soci@liststic than Sweden!!!!
    If we really want to be that, could we be it on the “take care of the poor” side too???

  17. No atheists in Foxholes; and no capitalists during a banking panic

  18. maynardGkeynes says:

    Go Barry! You are at your best here, you tell the simple (complex?) truth based on your (informed) conscience.

  19. super_trooper says:

    @DeDude ,
    Not socialiss, its corporatism in the US.

  20. PrahaPartizan says:

    eliz, besides proportional representation, if the 99% had any representation in the halls of power these days we’d be all to the good. Even the capitalists would learn that their profits batten when everyone can play the game and not just the plutocrats. Innovations don’t occur if no mass market exists for them to diffuse into to lower the development costs.

  21. [...] Save the system vs. save the banks.  (Big Picture) [...]

  22. Frwip says:

    Astonishingly, people in charge keep choosing to favor their own interests, which just happen not be yours nor mine.

    Not so astonishing if you think about it.

  23. MikeG says:

    “What is particularly galling is the way in which the spiels about our practicing free market capitalism gets stuffed down our throats by pompous gasbags while the favored few get saved.”

    Worth repeating. I suspect you were watching the Republican puke-funnel ‘debate’ last night.

  24. unfavorableodds says:

    It’s not Sweden we need to emulate. It’s the U.S. … of 1989.

    The handling of the S&L crisis is proof that at one time in this country, we knew how to do things right. Over 1,000 convictions. CONVICTIONS!!

    There was an entire government entity created to do nothing but shut down failing institutions. And guess what … it was a Republican president (Bush 41) and a Republican administrator (Seidman). That’s right, a Republican presided over a new government entity that shut down banks and threw banksters in jail for reckless fraud.

    So we don’t have to go emulating Sweden. All we need to do is start acting like we did 20 years earlier.

    You could even say Sweden learned what we forgot.

  25. xynz says:

    Sweden has an effective tax rate of over 50%. Its labor force is also highly unionized. High taxes + strong labor unions = ?????

    If you live RepubliConservativland, then high taxes and strong labor unions is the recipe for a moribund economy. Clearly, the Swedish economy must be lagging the rest of the OECD. Swedish society should be collapsing into violent chaos. In other regions of RepubliConservativland: Mexico’s 18% effective tax rate means that its bountiful prosperity is paying dividends in the form of lower crime rates.

    But if you live in the real world, then you find the Sweden is doing well. It’s not an outlier: Denmark and Norway have systems that are quite similar and they’re also doing quite well.

    Of course, if the last 10 years have taught us anything, it’s that facts have no place in RepubliConservativland. In RepubliConservativland, Saddam Hussien was part of 9/11 and he was going to nuke the US. The Great Recession was caused by Fanny, Freddy and the CRA. Barack Obama created TARP, the Democrats created the national debt, Global Warming is a hoax, people choose to be gay and Creationism is a better scientific theory than Evolution.

  26. reedsch says:

    BR says: “prepackaged bankruptcy, a/k/a temporary nationalization, is the preferred route to protect the overall system. ”

    You are suggesting that the proper response to a banking crisis is for the govt. to (temporarily) take over the failing banks. It seems they disagree, their response is for the failing banks to (temporarily…oh God please tell me it’s temporary!) take over the govt., thereby gaining the combination to the National Treasury’s vault and insuring an unlimited supply of liquidity, as well as political cover.

    This seems like a winning strategy to me. They even have armies of free-market apologists with no sense of irony to cover their backside. It doesn’t get much better than that. Any lab monkey is going to keep pulling the lever if 16 trillion bananas come out. Unless he’s finally full…do you think they think they’ve taken enough already?

  27. DeDude says:

    Beaten by Sweden, in our own game of capitalism – humiliating.

    What’s next – Stocholm takes the world series?

  28. abefroman says:

    Barry,

    Barry, we tried letting the banks take the loss. It was called Lehman Brothers. We let it fail, and look what happened? The stock market tanked, the financial sector imploded, and it was only through government intervention that the bankruptcy of most of the financial sector didn’t go bust, which would have almost certainly led to a second Great Depression. There are no easy solutions. The US was doing fine in 2011, ignoring Europe. Most banks saw bad loans declining and capital ratios improving along with a return to profitability. It wasn’t a great recovery, but it was positive. Bank of America is obviously in the most trouble, but they are only one bank and can be dealt with on an individual basis if necessary.

    The problem in Europe is the size and leverage of the banking sector (the banks are huge relative to GDP), and now of course the large amount of government debt in many of the peripheral countries. These are very distinct problems from the US.

    ~~~

    BR: We let one bank take a header on the pavement — that is nothing like the temporary nationalization/prepackaged bankruptcy I have been discussing for 3 years now.

    Oh, and that ONE bank — was AFTER we created a moral hazard by bailing Bear Stearns Fannie Mae & Freddie Mac

  29. Shadowfax says:

    Which part of “bondholder haircuts” do the geniuses running the banking system not understand?

    GM – Partially nationalized, bondholder haircuts, now profitable.
    Greece – Announce haircuts, stock market up 3%. Mess with that, drops 3%.
    Italy – ?????

    Do the haircuts so we can all say: “Yo Adrian, I did it!” and get back to business.

  30. JLK says:

    Loved the author’s lead-in to the comment section. Unfortunately he got exactly what he predicted on most of the replies.
    A few year back I read the history and philosophy of the 18th Cent French “Radical Enlightenment movement. It was interesting in several ways.
    1) Much of the US Constitution is based on their ideas
    2) Besides rebelling against the overweening political influence of the Catholic Church ( and at great personal risk), more importantly, it eschewed ideology in favor of pure logic.

    Since then I have become an Independent and do my best to follow the guidelines laid down by these brilliant Frenchmen. This allows me to avoid (as much as possible) the erronous judgements that I have seen in the replies. The issues brought up by the author are very complex and therefore specific ideologies do NOT have all the answers.

    As a result, in logic’s place you see replies that only answer the parts of the issue that pertain and agree with their pet belief systems. Important parts of the issue are left unanswered or avoided entirely because they do not fit in with something along the lines of the “Liberals Handbook for Dealing with Knuckle- Dragging Conservatives”. Since no ideology can in advance answer all questions pertaining to econ, geopolitics and such, the answers become half-truths at best.

    My take on the article is this: people are too focused on banks, Wall Street and other “villains” when the real answer to our problems is lack of economic growth. Regulations created after closing the barn doors too late to prevent horses escaping are only adding to the difficulties in recovery. The specific regs in Dodd Frank as an example, are only 50% complete a year later, leaving the banks wondering what they are supposed to do next. And then you vilify them for not lending. For every B of A there are 5 good well-run banks. But we have to focus on B of A.

    So the solution is not focussing 100% on knit picking the banks, it is creating legislation geared toward econ growth with a light but well-policed regulatory regime. Yes the bad ones (Washington Mutual comes to mind) should do perp walks (has not happened yet) but lets get on with reigniting our economy.
    JLK