Heja Sverige Posted by Hanna Lundqvist

Matt Yglesias had a great post a few days ago discussing Sweden's method of solving its 1990s banking crisis, in light of Barack Obama's recent reference to their success.  His post is a brief introduction to what Sweden actually did, and a discussion of how Sweden's more leftist (and sometimes socialistic) political system made it easier for them to take radical steps and solve their financial crisis.  Sweden's success is a noteworthy example for the United States, with some applicable lessons.

In response to Yglesias' post, I disagree with his characterization of the Swedish solution to its financial crisis as "Communism."  First of all, Sweden is probably best described as a social democracy; Sweden is not, and never has been, a Communist state.  The plan to solve their financial crisis was socialistic, an adjective which also applies to the U.S. government bailouts that give the state a stake in private companies by definition, however I think that the specific association of the Swedish solution with Communism goes too far.  Furthermore, Communism implies collective citizen ownership, which goes beyond the state ownership employed in the Swedish solution.

For a really good summary of Sweden's solution to its banking crisis, take a look at this September Financial Times piece.  Basically, in the early 1990s, Sweden faced a financial crisis and credit crunch created by deregulated credit markets, the burst of a property bubble, and a glut of non-performing loans.  The government moved quickly to create a new government-guaranteed company called Securum.  Securum, led by talented individuals from the troubled banks who knew them inside-and-out, then bought the bad credit and non-performing loans from banks at face value (instead of nominal, which is important), creating a good bank/bad bank system.  Though it had some hiccups, after borrowing government-guaranteed funds, through the careful management of its assets, Securum was able dispose of the bad credit.  Within five years of Securum's creation, the government managed to recoup most of its investment, and the banking industry was pulled out of its crisis.

Yglesias points out that an existing ideological acceptance of socialism made this type of solution much more tolerable for Swedes than it would be for Americans.  However, he also notes that "In the United States we’ve mostly been grappling around trying to find a way for the government to run the financial sector of the economy while we pretend it’s really still in the hands of the private sector."

Despite whether a Swedish-style rescue could be feasible for the U.S., there is one vital, simple lesson for the policymakers here to take from Sweden's approach: the importance and benefit of swift, decisive action and smart management.  From the U.S. response so far, I don't think we've seen much of either.

Comments

[nadezhda]

bought the bad credit and non-performing loans from banks at face value (instead of nominal, which is important)

But face value = nominal value. What point are you trying to make re the price paid for bad assets?

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