Left of Sweden
Paul Krugman keeps insisting we should nationalize our troubled banks:
But if you think that the banks really, really have made lousy investments, this won't work at all; it will simply be a waste of taxpayer money. To keep the banks operating, you need to provide a real backstop - you need to guarantee their debts, and seize ownership of those banks that don't have enough assets to cover their debts; that's the Swedish solution, it's what we eventually did with our own S&Ls.Now, early on in this crisis, it was possible to argue that it was mainly a panic. But at this point, that's an indefensible position. Banks and other highly leveraged institutions collectively made a huge bet that the normal rules for house prices and sustainable levels of consumer debt no longer applied; they were wrong. Time for a Swedish solution.
But as I said at the time - let's end these calls for nationalization, Swedish style. Sweden played catch-and-release with two banks on the periphery of international finance whose names are unknown to virtually everyone (Was one of them Fältskog-Ulvaeus Bank? Maybe! I am sure I've heard of them...).That hardly demonstrates that the same Congress that embarrassed itself this week on the AIG bonuses has the discipline and patience to oversee Citbank, Bank of America, and a few major regional banks all nationalized at the same time.
Having lived through the Swedish banking crisis in the 1990s, I am struck by how poorly the American public understands what really was a successful cure that remains relevant to the current situation. In fact, the Swedish example would probably provide the best, most capitalist, solution for the United States.[snip]Substantial bad debts are like a worm in an apple. If you leave it alone, it will devour the whole apple. Nonperforming loans keep nonperforming enterprises alive, but they should be sold off or put into bankruptcy. Until they are written off, they will attract more good money, which will be wasted. It is sheer waste to try to recapitalize a damaged bank, as the US government has done with Citibank and others.Intellectually, the case is evident, but to force banks to write off $1 trillion requires a lot of political courage.Sweden did not nationalize its banks. It was Norway that did so, which is an alternative model. In Sweden, a temporary emergency bank authority was set up on the model of the US Federal Deposit Insurance Corporation. It had outside, mainly foreign, consultants to scrutinize all bank debts and establish objectively which were nonperforming. The banks were forced to write off their bad debts and transfer them to bad banks.Sweden had no aggregator bad bank and the bad banks were not nationalized. Each big bank set up its own bad bank. They were given illustrious names such as Securum, Retriva, Nackebro and Diligentia. Securum was the biggest bad bank belonging to the already state-owned bank, Nordbanken, and it became a separate state company. The private bad banks, however, remained the property of the private banks from which they were removed.
Further evidence that we are getting left of Sweden is that the Swedish Government is not following Obama's lead respecting GM. When Saab asked for help, the Swedes refused:
...the Swedish government has responded to Saab's desperate financial situation by saying, essentially, tough luck. Or, as the enterprise minister, Maud Olofsson, put it recently, "The Swedish state is not prepared to own car factories." (cited here
h/t: Jim Glass, Patrick R. Sullivan