Gillian Tett: Washington is talking to Swedes about banking crisis solutions
Gillian Tett has written in the Financial Times that the Obama Administration is no talking to the Swedes directly about their solution to the credit crisis, suggesting a openness to potential banking crisis solutions. Next week, Bo Lundgren, now head of the Swedish debt office, but formerly a Deputy Finance Minister under Carl Bildt, is scheduled to meet with American officials in Washington. For those of us who see positives in the Swedish crisis solution, this is positive news.
Washington’s Congressional Oversight Panel has summoned Mr Lundgren and others to explain how they fixed Sweden’s banks – presumably to glean tips on what Washington should do next.
The Nordic gods might well chuckle at this twist in the global financial saga. As recently as last autumn, the phrase turning “Swedish” was tantamount to an insult among most American politicians (and on Wall Street, the joke currently goes, Swedish models used to only attract attention when they were blonde and leggy). But these days, as the economist Nouriel Roubini recently observed, “we are all Swedes now” – at least in the sense of using state funds to fix the banking mess.
Hence Washington’s sudden invitation to Mr Lundgren and his colleagues. Whether the Americans will actually like the message that Mr Lundgren and others wish to impart, though, remains to be seen. For many Scandinavian observers are distinctly critical about what the US is currently doing with its banks. In Washington, politicians are wrapping themselves in knots about words such as “bail-out”. But to the Swedes that misses the point: the really important issue is not whether state money is used, but how it is dispersed. After all, as Mr Lundgren notes, “the word nationalisation can have many meanings” – and not all are very effective.
Sweden’s own crisis bears this out. When its banking woes first erupted, Stockholm (like the US) initially responded with procrastination and denial. Eventually, however, it nationalised two banks, wiping out the shareholders, and placed toxic assets into a special “bad bank”. That cost the government about SKr60bn-Skr70bn (although much of that sum was later recouped through asset disposals). To some extent, many western governments are copying elements of this approach. The UK and US, for example, have partly nationalised banks such as Citi and Royal Bank of Scotland. But, thus far, the UK and US have not ringfenced bad assets, preferring to urge the banks to deal with them while still on their books (supported with complex guarantee and financing schemes.) Anglo-Saxon governments have also refused to wipe out shareholders in banks such as Citi and RBS, for fear of looking too “socialist”.
Much has been made of the Swedish banking crisis solution because it involved pre-privatization of two banks and this strikes many Americans as distinctly ‘socialist,’ a term reviled in U.S. political parlance. The Obama administration has repeatedly rejected the suggestion that it would nationalize any of the large American banks. Yet doubt still lingers.
I have suggested that pre-privatization should be a leading option to consider by the Obama Administration in a number of posts:
- America needs a pre-privatization plan (Feb 2008)
- Lessons from Swedish bank resolution policy (Mar 2009)
- The global economy has crashed: we need a comprehensive credit crisis plan (Sep 2008)
- The Swedish banking crisis response – a model for the future? (Aug 2008)
However, I do recognize the need to look at other solutions. Nationalization is but one option. The key is to restore confidence in the system and this may involve guarantees for bondholders which many find unpalatable.
But the more serious criticism lies with what is not being done. While Stockholm was nationalising two banks in the early 1990s, it also offered a blanket guarantee to any investor holding any Swedish bank liabilities (except for shares or subordinated debt). These days, that measure is not well known outside Sweden. But many Swedish officials and bankers consider that guarantee to have been the most crucial decision of all.
Moreover, it remains to be seen how applicable the Swedish crisis solution is to the United States. Two Swedes high in the political ranks during the banking crisis there in the early 1990s have offered very different views on this subject on the site Euro Intelligence, the second highlighted here due to my preference for its analysis:
- Sweden may not be a model – Euro Intelligence
- Lessons from Swedish Bank Resolution Policy – Euro Intelligence
And, indeed there are some very negative consequences to models like the one adopted in Sweden as I argued in November in my post, “The problem with comprehensive banking crisis solutions.” Ultimately, I am heartened by the fact that the Obama administration and the Congress are looking into all available antecedents of the present crisis for potential frameworks. This should give one a renewed sense of faith in the wisdom in Washington.
Sources
Insight: US is ready for Swedish lesson on banks – Gillian Tett, FT.com
OMFG (oh my …god) – the Swedes have trotted out Bo Ljudgren. This guy is almost single handedly responsible for more political and economic debacles than any other politician I an think of in Sweden. Ljundgren is the Swedish equivalent of George W. Bush minus about 30 IQ points. When he was head of the Center Right (i.e. Moderaterna) party its membership crashed to a level under 50% than what it had than when he took the helm.
I’ve said my piece several times over on the BS the Swedish politicians are spreading about the “Swedish Bank Nationalization Plan” (i.e. it was *one bank* and “not a plan”) so I won’t beat that dead horse further.
But if Washington wanted to pick the single most clueless of the clueless louts that engineered the Swedish banking crash in the first place, then they truly have the right guy. I am sure Ljundgren will wax poetic and spin a wafting yarn of his and his fellows competence as the stewards of the Swedish economy. If only Pinnochio were true we could watch his nose grow ’til the swallows roosted and raised families.
If Washington adopts any part of this clown of a man’s advice then we are really in very very deep doo doo. Sweden’s economy did not recover due to nationalization or any other dubious policy actions by Ljundgren and his fellows. Sweden’s economy recovered becuase it is top heavy in the tech sector, and the Internet and mobile phone booms took off simulatneously starting around 1993. The tide lifted all boats including the foundering and oarless Swedish bathtub captained by Ljundgren and like minded landlubbers of his ilk.
I shudder for the repercussions if Obama and team adopt anything this guy recommends.
AITrader,
I get the sense you are not a fan of the Bildt government. Tell me a little about your view on that government and how any of what they did can contribute to a plan in Washington. Also, it would be great to hear your view on what needs to be done generally to shore up banking systems.
Cheers.
I should apologize in that my criticisms of your admiration for the Swedish system and policy makers stems from a fundamental misunderstanding, on your part, of their goals. It’s not an indictment of the Bildt government per se. I am more critical, if you can believe it, of the Persson government that followed. As for Swedish politics, or politics in general for that matter, I am a financial conservative and somewhat of a social liberal. But let me start why Sweden is a bad model for the current problems we need to solve:
Sweden is a two class society. It consists of a ruling class of about 10,000 persons and a middle class of everyone else. The ruling class owns and controls around 45% of the entire Swedish GDP directly and controls another 35% or so via interlocking directorships in state owned industries and companies. This group of 10,000 is mainly confined to branches of nine extended families. There is zero mobility from the middle class to the ruling class, with the possible the exception of politicians who attain the level of Prime Minister. Outside of this one exception, the ruling class is entirely hereditary. As an example, many folks think that IKEA is a Swedish company. It is not. The owner, Ingvar Kamprad, fled Sweden long ago when the Swedish ruling class moved to take IKEA over and freeze him out. (IKEA is Dutch company).
So when you view the Swedish ideas of “nationalization”, or any other Swedish economic or political policy for that matter, and view Sweden through the lens of a multi-class, free market society you will see things that are not there. You will assume goals that the Swedish politicians and ruling class do not have and do not share. Nationalizing a bank, or anything else, is not designed to restore a free market society. It is designed to keep capital and control in the hands of the Swedish ruling class. If you examine the current ownership of voting shares in the formerly nationalized Nordbanken bank (now renamed the Nordea bank), you will find the Swedish government and the Swedish ruling class families are back in control.
So if your solution to the US and British banking crises is to keep capital concentrated in the fewest hands then Sweden may be a model. If, on the other hand, your goal is to refloat the banking system in order to relight the pilot light of the free market furnace, then the Swedish model is based on a system whose goals are entirely incompatible.
If you are interested in how the Swedish ruling class maintains its wealth and control I can offer a few tidbits. One method is to declare a small class of shares in a company “voting shares” and all other shares “non-voting”. The well-known Wallenberg family ( https://en.wikipedia.org/wiki/Wallenberg_family ) uses this method with their SEB bank and their investment firm Investor AB, for example. The family owns a minority of shares in these but controls the voting rights hence the companies themselves. Another method is to keep these voting shares in a Swedish foundation. The foundation is run tax-free and is able to accumulate and distribute profits with zero accountability. Though occasionally an upstart politician finds his way into parliament and calls for audits of these foundations. The audits never occur and the upstart either falls into line or falls out of politics.
There are many more ways that the ruling class maintains its control of the Swedish economy, but to describe them all would be a very long essay indeed. I do find it a fascinating system. I am still amazed to see how the old European oligarchies have modernized and still maintain their control to this day – even in a pluralistic multicultural world dominated by liberal democracies and free markets.
So your premise that the Swedish model is applicable to the current crisis is based on a fundamental misunderstanding of the goals of the Swedish policy makers and the function of the Swedish financial system itself. A free and open system is not one of these goals; quite the opposite in fact.
AITrader,
Thank you for the clarification. A few points and questions for you. First, I do not misunderstand the rationale behind why Sweden took the approach that they took. From my perspective, all of that is irrelevant. It is a historical issue from another country.
I look at this from a utilitarian perspective. I find the politics of Sweden less interesting.
What DOES interest me is whether the framework set up has utility in the present day for countries with banking crises like the U.S., the U.K., or Ireland. I certainly believe it does for several reasons. (The solution achieved its goals relatively quickly. It induced less moral hazard than the present solutions in the U.K. or the U.S.. And it helped restore confidence in the banking system).
What I want from you is an alternative solution for today for the U.K., the U.S. or Ireland rather than a recitation of where this solution failed in the early 1990s given your opposition to this option.
That said, I am aware of the class structure in Sweden and the relatively confiscatory tax system there as well. I appreciate your taking the time to share your views on the subject with readers. Read Stefan Karlsson’s blog for an Austrian view to this:
https://stefanmikarlsson.blogspot.com/
I sense that you – as a social liberal and fiscal conservative — are also in the Austrian camp. And that should give you misgivings about the ‘nationalization’ solution. Despite my own misgivings, I see it as necessary in much the same way I have misgivings about fiscal stimulus but feel is necessary:
https://pro.creditwritedowns.com/2008/12/confessions-of-an-austrian-economist.html
One thing you said earlier which I find interesting is the degree to which the tech bubble bailed out Sweden – and I would assume Finland. We can’t assume that in the absence of that boost to the economy, Sweden would have recovered so quickly. Nevertheless, I am still looking to see if you have any suggestions of the way forward.
I do feel I have made my point of view clear and logical.
Cheers.
I guess I lean toward the Austrian School, when I have to put on the monetarist hat. Any belief I have in economic theory goes back to Adam Smith and the effects of the invisible hand. I view the debt based money creation scheme, with its built in inflation, and especially the current fiat money system, as a Ponzi scheme on a grand scale. It has worked so far mainly due to very cheap energy inputs over the last century. And it is dependent on constant expansion, which appears to be becoming more and more difficult to achieve if one looks at the decreasing money multiplier effects ever increasing credit expansion.
So with that caveat, the only way I see to put a huge band-aid on the current system in situ and leave it intact in its current form is to go directly to the root of the cause of the breakdowns and bailout the mortgage holders, meaning the actual people that took out the mortgages. And it may well be too late to do this since the first Alt-A and sub-prime collapse has dominoed out to commercial credit, consumer credit, and other tangential markets.
If the governments, perhaps on a bank-by-bank or region-by-region basis, made sure that enough mortgage payers could make enough of their payments then the entire system above it will hold. (Or would have – again we may be closing the barn door after the horse is far to gone to put back in). This includes every tier of derivative tissue paper, every insurance bet, etc.
Concomitant with this form of bailout I would recommend that they enact regulation of the derivatives market with a maximum amount on obfuscation allowed. I.e. a derivative instrument cannot be more than X levels from whatever thing of intrinsic value it is based one – whether X is 3x, 4x, or 5x I can’t really say.
So with a regulatory framework unwinding derivatives from the top down to a reasonable and manageable level, and with mortgage relief from the bottom up to keep the derivative chain from collapsing, the whole system can be healed without resorting to knee-jerk fixes on a company-by-company basis where only the tail end derivative chain at 5x levels or higher from the underlying thing of value is fixed. The current attempt to fix things from the top down is not going to work and will result in a collapse of the entire system all the way to sovereign governments. The only way to heal it is at the source up the chain from the bottom while unwinding the leverage within a sound regulatory framework from the top.
Now, that’s the ticket, AITrader. Bravo on the suggestions. I would echo your concerns, however, that it is probably too late on some of this. And your comments about fractional-reserve banking being a bit of a ponzi scheme are similar to things I said in this post:
https://pro.creditwritedowns.com/2009/01/bailouts-catching-a-falling-knife.html
Cheers.