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 . . .
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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
Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data, ability to repeat discredited memes, and lack of respect for scientific knowledge. Also, be sure to create straw men and argue against things I have neither said nor even implied. Any irrelevancies you can mention will also be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.
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.”
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.
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.
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.
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.
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.
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.
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.
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.
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
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?”
I imagine they don’t have lobbyists either. Or a Wall Street.
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.
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.
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%.
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???
No atheists in Foxholes; and no capitalists during a banking panic
Go Barry! You are at your best here, you tell the simple (complex?) truth based on your (informed) conscience.
@DeDude , Not socialiss, its corporatism in the US.
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.
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