Here is an excerpt:
Sweden placed its banks with troubled assets into a so-called bad bank, where they could be held and then sold over time when market and economic conditions improved. In the meantime, it used taxpayer money to provide enough capital to allow banks to resume normal lending.
In the process, Sweden wiped out existing shareholders.
.....
To be sure, the United States has a much larger economy than Sweden’s, with a vast and international banking system. The toxic assets Sweden took from its banks improved when the economy improved, but Sweden wasnot confronted with a global recession.
Still, many analysts believe that Stockholm has lessons for Washington.
In effect, the Swedish state took on all the assets that were worthless or impossible to value at the time, and then managed them or sold them with the aim of getting as good a deal as possible for the taxpayer.
“We hired real estate people,” said Lars H. Thunell, the former chief executive of Securum, the institution that became Sweden’s repository of all the underwater assets. “We hired industrial M.& A. people. We needed to manage real assets.”
I've come out against nationalization, but that doesn't mean I don't find the above reading very interesting.
4 comments:
Dude --
No "today's markets"?
No "w/e w&b"?
Is everything OK in TX?
Just curious. Why are you against nationalization?
Seems to me there are two broad policy options here, just as Sweden had (one of their top banking regulators laid this out in a speech to IMF I believe):
1) you allow the banks to avoid recognition of their losses, being extraordinarily accommodating of capital requirements and the like. You hope that the market can recover on its own, and these banks can raise enough capital in the private markets to offset their losses, which will hopefully be mitigated by a recovering economy.
2) you force the banks to recognize their losses, hit "reset", and if there's not enough private capital immediately available, you provide government funds and guarantees.
Sweden, of course, chose the latter, as did the USA during the Great Depression. And Japan, famously, chose the former, leading to their "lost decade".
Right now, we are doing a sort of hybrid of 1) and 2), allowing banks to avoid recognizing their insolvency, while providing patchwork ad hoc guarantees and capitalization when even an accommodative approach can't hide bank insolvency.
I assume you think 2) is the right approach, because frankly, it is. At this point, it doesn't seem appropriate to claim that the private markets can recover on their own. And so if we're going to inject massive amounts of government funds, why not do it in a way that actually restores confidence in the credit markets, i.e. force all banks to take their writedowns at once, so credit market participants are finally confident that future counterparties will not fail going forward?
So if we're talking about injecting massive government funds, more than these banks are worth, which I have to believe you agree with, because the alternative is frankly silly, then the question of nationalization or not-nationalization is simply a matter of best execution. Whether the government takes control or not does not change the fact that we are paying enough that we could take control without raising any thorny issues. I.e. if Warren Buffett provided Citi with the amount of funding the federal government has (frankly, if he provided 1/10 of what we've provided), he would insist on full, unrestrained control over Citi. And no one would argue with him.
So I assume your opposition to nationalization must come from some economist-based anxiety, such as I've heard from most center-left economists these days, about the spectre of government control over the credit markets, government being inefficient managers, etc.
Assuming we can all agree on that, I think you're still ignoring the compelling arguments for nationalization. Most importantly, MANAGEMENT. You are allowing the same management that bollocksed things up so badly to continue on? Ridiculous. At the same time, every objective onlooker can agree that in this situation, the incentives for managers representing shareholders are diametrically opposed to those of the taxpayers. Shareholders want maximum short term gains. The taxpayer wants a restoration of credit market confidence (aka lending) as soon, and as cheaply, as possible.
At the same time, the recognition that firms are "too big to fail" means that managers representing shareholders have perverse incentives to expose taxpayers to more risk. Why shouldn't BofA acquire Countrywide and Merrill without any due diligence? If it succeeds, shareholders are handsomely rewarded. If it fails, the government will step in.
At the same time, there's ample historical precedent (albeit with smaller financial systems) that government CAN step in, temporarily nationalize banks in the interest of the overall financial system, and then dispose of those banks in timely fashion. The goal here isn't and shouldn't be to have a permanent government takeover of the financial system; rather, it is to "reset" the system at least cost by providing government assurances that the system is guaranteed, solvent, and that bank managers have their incentives aligned properly. Temporary nationalization is simply a means to that end.
I am finding that far too many economist-types these days have swallowed the neoliberal Kool-Aid, and are simply incapable of recognizing that desperate times defy the ordinary models, and require desperate solutions.
Or to wit, we've already paid for the damn thing, why not make sure we're the ones in charge, rather than the folks who messed it up in the first place?
What we have now is corporatism: we have nationalized the banks but we let them be run by their former owners. Socialism is when the govt. is in charge.
"Fascism should be called corporatism" - Mussolini
Massive socialism or minor socialism? Douche indeed; Congratulations for Sweeden. They can collectively pay for the folly of the few.
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