More About Bank Nationalization, Swedish Style

Once again, the NY Times recalls the Swedish banking crisis of the early 1990’s.  I hope a little Swedish economic history will remind America of what a successful response to a bank meltdown looked like.  In the 1990’s, when they faced a financial crisis similar to the one American banks now deal with, the Swedes moved in to inject capital into failing institutions—but took power as shareholders when they did.  They didn’t offer to buy non-voting stock, or give loan guarantees, or make deals to limit bank losses, while their taxpayers took the hit.

The Swedes partially nationalized their banking system.  The action brought the banks back to the credit markets, with the government directing the companies that accepted capital injections.  In addition, a side benefit of their hard line of hammering stockholders of the failed banks was that the more stable Swedish banks found a way to deal with their own troubled assets through private investment, rather than losing their stockholders’ shirts in a public takeover.  They didn’t have the option to come crying for toothless bailouts and loan guarantees, as the biggest American banks have been doing throughout the brief but expensive Paulson Administration.

 There’s a substantial amount of pressure on Obama to eschew nationalization.  A move like the Swedes’ takeover seems radical in contemporary America, even though the Swedish action was the plan of a center-right government.  An expensive capital injection at this moment seems politically very risky, especially since hundreds of billions of government funds have already been spent on bailing out banks, and spent, shall we say, less than effectively. 

 But however difficult it is to reconsider a new recapitalization through tough love, the alternative “bad bank” concept that’s being floated again to the press this week is no better an idea than it was when Paulson first proposed it in September 2008— and it still stands to sap taxpayers of more lucre— without the promise of putting the banks back in a lending mood.  Any plan to change the TARP had better open up the credit markets, or there will be political as well as economic hell to pay later, no matter how expensive it turns out to be.

 George Soros wrote yesterday in the Financial Times about a partial nationalization model as the best of our bad remaining options, saying it, “would inflict great pain on a broad segment of the population - not only on bank shareholders but also on the beneficiaries of pension funds. However, it would clear the air and restart the economy.”

Let’s hope the Obama Administration has the courage and boldness to do what’s needed, rather than to simply limp along with a halfhearted troubled asset purchase plan (the ‘bad bank’) that won’t lift us out of the serious slump that now threatens to become a depression.  If it makes anyone feel more optimistic about spending the money, maybe it’s worth remembering that when the Swedes sold their investment in banks back to the private sector four years later, their government made a handsome profit off the takeover.  

Maybe we should call this a ‘free-market investment plan,’ to take the edge off it for those afraid of government spending.  If it helps to sell a program to save our economy, you can call it the 'Reagan Plan,' for all I care.

UPDATE- For those interested in more thoughts on nationalization, here is a linkfest at the FT.

Comments

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Here’s another issue raised by the anti-nationalization crowd:
A lot of the toxic assets are held by large international banks and sovereign wealth funds. If we cut them loose, we risk making the international component of this mess much worse.