Swedish vs. Japanese

People have commented a good bit on the right rescue plan for our fianancial system. You tend to know my view if you read my post. Well, I am not making it all up. We have a couple of very fine recessionary models to compare our response against. Two key comaprisons are the Swedish model the Japanese model. Let me begin by saying I have not studied either in detail but I understand that to stimulate the Japanese economy the government there eventually dropped a lot of yen on the fanancial institutions there. They are still in the hole, so you judge how well that worked.

Then again, a few countries, including Sweden, experienced their own banking crisis a few years back. From what I have read they nationalized the heck out of their financial industry and had no qualms about taking down the dead wood so the healthier companies could survive. Now as I wrote the other day, there is too much financial interconnectivity between major financial institutions today - but we really need to follow the Swedish lead if we can. Let me begin with a small quote from the attached article so you can judge wether this has relevance:

"Following the deregulation of the domestic financial market, the crisis in Sweden was also preceded by a rapid expansion of credit; in the course of five years, private borrowing grew from 85 to 135 % of GDP. The credit expansion coincided with a protracted boom and a significant proportion of the borrowed money was spent on speculation, both in real estate and in financial assets, such as equity. The real estate speculation in Sweden culminated in a bubble that burst in 1990-91. Shielded by the economic upswing, there had been many misdirected and overly optimistic investments in various industrial and other projects."

This site went on to note the high borrowing rate in Sweden as well as high public debt and a low savings rate - sound familiar? But here is the key part of the site:

"A common framework of measures was constructed for support of the banking system. A strategy for deciding which banks to reconstruct and which to liquidate was developed and explained to the general public. The measures were designed to minimise costs for the Government and the risk of moral hazard. Consequently, shareholders were not covered by the government guarantee and would lose their equity investments to the same degree as the Government had to provide support for their banks. This provided an incentive to the owners to avoid applying for state support unless it was absolutely necessary, to minimise the amount of support and to reduce the time-period of receiving support. We used a very simple, but clear and easy-to-explain, method of identifying banks which should be given support in order to survive and those which should be liquidated or merged. First you write-down the bank’s bad loans. Then you test the bank in a micro- and macroeconomic model. If the model indicates that the bank will be adequately profitable again in the medium-term future it should be given support to survive. But if the model indicates that the bank will never be profitable again the bank will not be of economic benefit to the society and should thus be closed or merged in an orderly manner."


This lesson plan is woth a lot more study, please read it. I am NOT saying I agree with all of it but it is worht some very careful thought. Some of it is much smarter that what we are doing.

http://www.riksbank.se/templates/speech.aspx?id=1752

Disclosures: None