Friday, February 13, 2009

The Road to Sweden, or the Road to Japan

As I have mention before, this crisis is NOT unprecedented, which the U.S. government keeps claiming. The reason that they’re claiming this is partly that they don’t understand it, and partly that they won’t admit how much trouble the banks are in. I can understand the latter to some extent; admitting this would probably create a panic.

The two crises in Sweden and Japan in the 90s had the following attributes:

1. The banks became insolvent because of bad assets

2. The bad assets were hidden off their balance sheets, meaning that they could not be seen by the public or the government

3. The bad assets were made up of complicated financial products related to real estate speculation

Sound familiar? We have here three almost identical crises, and two different approaches in dealing with them: the Japanese way or the Swedish way.

The Japanese way resulted in “Japan’s lost decade”, with huge job losses, capital destruction and an immense waste of taxpayer money. A sustained weakening of the Japanese economy occurred, which harmed Japanese competitiveness greatly.

The Swedish way certainly created short term pain for the country, but the net result of the crisis was an actual profit for the taxpayers, a sustained budget surplus and an eventual lowering of the national debt. In short, the country came out of the crisis stronger than before.

Another thing that, by now, may sound very familiar to Americans, is how the Japanese dealt with their crisis. They did the following: gave the banks hoards of money with no strings attached, bought bad assets, attempted to have a public/private partnership in buying up bad assets (which Geithner just recently suggested), passed multiple stimulus packages and lowered interest rates to zero.

Japan did all this, and everyone now agrees that none of it worked, otherwise they would not have had a “lost decade”…. The country’s crisis was not resolved until they did what Sweden instead did. The Swedish government did the following:

- Ruthlessly combed through the books of the banks to weed out which banks could be saved, and which could not be

- Nationalized the ones that were deemed to be able to survive, and let the weak ones fail

- Wiped out all shareholder value and fired bank management

- The government had to actually learn all there is to know about the assets, so that they could be sold at the highest price. They did not simply let stock market “experts” dole out money to their buddies.

Prior to the rescue, the Swedish Parliament had passed a law giving it the right to do all these things if a bank’s equity in relation to its debts fell below 2%. Many U.S. banks are far below that threshold now.

So, the U.S. government has two very clear alternatives: one that has been proven to work, and one that has been proven to be disastrous. It doesn’t get much clearer than that.

The U.S. government is currently furiously pursuing the disastrous course.

Moreover, I advise that the winner-takes-all voting system should be destroyed.


Anonymous said...

Did the Japanese or the Swedes have as much consumer debt as the average American?

Jacob said...

No, they did not. There are several reasons why, the most important one being that they did not need to take out as much debt.

The financial situation of the average Swede or Japanese is very different from that of the average American, in that Swedes and Japanese don't need to pay for things like health care, elder care, child care, private pension plans or any type of education.

From a general societal perspective, the debt situation in the United States is related to the lack of wage growth since the 1970s and the additional costs American citizens face. The single most common reason for bankruptcy filings in the U.S. is medical bills. In Sweden, a heart transplant and 2 years of recovery costs $20 in co-pay, and by law, your job is waiting for you when your doctor ascertains that you have recovered.

an average patriot said...

They knew the examples and they were part
We took the world down during the first great depression. We are bringing the entire world down again during this the second greatest Depression.
Remember it was not the new deal that got us out nor will it this tine either.
The Republicans caused it then and they caused this one too. Oh yeah WW2 got us out then and well I'll shut up!