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Don't Fear the Swedish Model
"There are similarities [to Sweden's case]," Lundgren said. "There are three things any plan must do—the first is to maintain liquidity, that's taken care of by the Fed. The second thing is to restore confidence, and that hasn’t been done so far and obviously the first proposal to buy toxic assets wasn't enough. And then you need capital injections so banks can keep lending at the levels needed for the economy as a whole."
However, Lundgren said that Obama was correct in observing that a similar nationalization scheme might be more difficult given America's size and preeminent role in world finance compared to Sweden.
"With Japan and Sweden, the crises we had, even if it was a very long process with Japan, they were crises that we had on our own," Lundgren said. "The rest of the world economy managed to be not perfectly good but still reasonably good. This time it's worse; it's a kind of financial tsunami."
According to Lundgren, the question of whether the White House follows Sweden's example or not is less important than the larger goal of soothing investors' current panic over the financial crisis.
"Even if it’s a totally different situation, you have to get the financial system in order and in order to do that you have to get confidence," Lundgren said. "Franklin Roosevelt did it by closing all the banks and reopening the sound ones, we did it with a blanket guarantee to creditors and depositors. And Japan, well, they didn't do anything, to be honest. Now the question is what can be done in the US. You don't need the same techniques, but you need to restore confidence."
Lundgren said he has been most encouraged so far by Geithner's promised "stress tests," which will look at banks' balance sheets to determine if they are healthy enough to receive bailout funds and still function in the depressed economy. Some economists, Krugman included, have suggested that this approach could prove to be a backdoor route to nationalization, as banks that prove insolvent after undergoing a stress test could force the government to take a more hands-on approach. Either way, Lundgren said the tests will at least help Wall Street separate the good banks from the bad, a crucial step toward talking investors down from their current ledge and back into bankrolling the abandoned finance sector. He advised that the tests be done quickly for maximum affect, getting painful discoveries out of the way in one fell swoop.
"If the situation is bad and a lot of banks have bad problems, it’s better to get it out into the open than hiding and waiting, because it then takes longer to manage the crisis," he said. "What you have to do is be very transparent. We started implementing a very straight process of evaluating banks' balance sheets–something Japan didn't do, for instance."
One other step America could take to bolster confidence would be to put a bipartisan sheen on any bailout plan, something Sweden did in the 1990s with a coalition of center-left and center-right parties. Of course, given how recent policy debates have turned out (total Republican votes for the stimulus: three), this may be tougher to achieve in America.
"If you are going to have a financial crisis, please have it after an election," Lundgren advised, noting that last fall's bailout battle was negatively influenced by politicians who were afraid to face voters over the unpopular measure just weeks after their vote. "I don't know how the situation is in the US, but if there could be a bipartisan agreement to handle this, it would be a much better thing, more stable and with less-critical risk."
Benjamin Sarlin is a reporter for The Daily Beast. He previously covered New York City politics for The New York Sun and has worked for talkingpointsmemo.com.
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workonit
The bipartisan part won't happen, because the Republicans are betting on recovery efforts to fail. We'll see in coming weeks if they are above outright saboutage.
MrsMurgatroyd
It sounds like socialism and it is socialism but the truth is that our country is headed that way. In fact it is. The Republicans can fight it but in this Global World there is no other way.
I liked this article. Sounds like a good idea to nationalize the banks and insurance companies. Is Health care for everyone not socialism? I believe in the US and its constitution and its laws. But we need health care, economic stability and education plus jobs for our people. Obama is learning and probably the hard way but my bet is he will succeed. There is a little immaturity there but he will grow into the job. Expect white hair in just a few years.. Republicans get on the train.
dumdums
The approach relies, in large part, on the market. Unfortunately, these are the same institutions that created the problem. The issue is this: as the Fact Sheet Treasury released describing the PPIP Program notes,
"the financial system is still working against economic recovery." (No kidding.) As we noted in April, 2008:
"With the development of toxic (derivative and subprime lending) financial products, the relationship between investment banks and the economy has turned parasitic."
Further, the solution outlined by the Administration relies heavily on the assumption that "these assets create uncertainty around the balance sheets of.. financial institutions." This is a false assumption: the behaviour of financial managers created the uncertainty. While we are not "in despair", as is, apparently, Paul Krugman, we recognize that any "solutions" that do not explicitly address the ethics and behaviour issues are, well, problematic.
See: http://twisri.blogspot.com/2009/03/public-private-investment-program-ppip.h tml
skoda31
why would the Republicans vote ye on obamas plans? pelosi already showed that she will pass them with or with out Republicans? the dems can pass whatever they want without the right on their side the only reason they want them on their side is so both parties can take the blame when it does fail.
whats wrong with a party finally standing up for what they believe and trying to be fiscally responsible? or whats wrong with a party disagreeing with the right solution and voting against a bill they feel is bad for the county?
and how would Republcans saboutage the plans obama has set through while sitting in washington dc?
you are just trying to put blame on the minority so that the dems dont look that bad when everything blows up and we have double digit inflantion or worse.
Ritarita
Except
Geithner knows
The Swedish model is too small.
And bipartisan sheen
Can't pretend to happen
Because success means
The end
Of Republican ideology
As we know it.
@skoda31
Your damned
House is burning down
And all you can
Think about
Is paying the light bill
On time
Fiscal responsibility
Would have been really great
If only you'd
Thought of if
Eight years ago.
You're late to the party
And obviously you were late
Getting to
Econ 101 too.
TotalRecall9
If only we had socialism, it would be easier to fix this mess. But Congress and the White House are trying to protect rich investors and big companies. Instead of replacing the healthcare system, they are doing a patchwork so it doesn't harm insurance companies. The USA really doesn't have a capitalist system or a democracy, but a plutocracy system. Some change Obama promised!
Genni2002
It isn't a bad system in Sweden and I know about it very well having lived in Norway for 7 years (they follow Sweden like its shadow!). The U.S. is doing just the same thing socialism does but as TotalRecall9 says, just for the rich. People who actually work get squat in the U.S.A (a system that I can also talk about having been raised in and worked in a technical field most of my adult life). But no, for the heart and soul it is considered to be welfare.
Operative word 'work', by the way! Guess they don't know the meaning of the word in the finance sector?
lovestooread
Restore confidence, Yes of course. Get lending for infrastructure. Due some obvious little things for market growth.
More to follow so devastating ,whats next? No major move, because whats next?
Really you must start calling Obama President Obama. Really!
That too is an in road to confidence.He is earning his pay check!
Thank you.
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