What the Swedes did and did not do

Kevin Drum reports:

First off, here's what they didn't do:
  • They didn't act all that quickly. The real
    estate crash and the resulting credit losses began in late 1990,
    solvency problems started to become acute in late 1991, and a variety
    of treasury guarantees and capital injections were tried for another
    year after that. (Sound familiar?) It wasn't until late 1992 that the
    Swedish government finally took serious, systemic action.

  • They didn't nationalize the banking system.
    Only one bank, Gota, was taken over, and that happened only after it
    had collapsed. And aside from Gota, only one bank received a
    substantial amount of capital injection: the state bank, Nordbanken,
    which had much bigger problems than most of the private banks.

  • Generally speaking, they didn't fire existing bank management.

So what did the Swedes do? The main thing was
simple: in late 1992 the Swedish government guaranteed all bank
obligations throughout the system. They did this immediately for Gota
after its collapse, and two weeks later for everyone else.

What else? Not too much, actually. An agency was formed to dig into
the portfolios of nearly every major bank, and this resulted in a
capital requirement guarantee for one bank that was never used. In
addition, the shareholders of Gota and Nordbanken were mostly wiped out.

Keep that all in mind the next time it is recommended that we mimic the Swedish model.

Addendum: Interfluidity comments and in part dissents.  And Kevin replies.


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