Don't Fear the Swedish Model
Bo Lundgren, Sweden’s minister for fiscal and financial affairs, stared down a financial crisis in the 1990s and lived to tell the tale. In a Daily Beast interview, he says the US could learn a thing or two from his famed solution.
In happier times the words "Swedish model," were more likely to be found in a Budweiser ad than a Wall Street Journal op-ed. But with the financial sector in ruins, a debate over whether to follow Sweden's lead and nationalize America's weakest banks has given the phrase an ominous new context.
At one point last month Sweden's plan was approaching consensus opinion, with conservatives like Sen. Lindsey Graham and former Fed Chairman Alan Greenspan finding common ground with liberal economists like Paul Krugman. President Obama countered that the US had many more banks than Sweden and a profoundly different culture. And with the announcement Monday of the administration’s plan to buy up toxic assets using a combination of public and private investment, the dreams of a Swedish solution in America are being put to rest.
"From the market liberal's perspective, don't be afraid of Sweden being a socialist example because in this respect we are not," Lundgren said.
Before today’s news, The Daily Beast called Bo Lundgren, who, as minister for fiscal and financial affairs, conceived and implemented the famed "Swedish model" in the 1990s. Lundgren said the American fears of a Swedish planet are largely misguided.
"I'm a market liberal. My party that I used to lead, the Moderate Party, is the conservative party in Sweden and the parallel to the Republican Party in America," Lundgren said. "When I nationalized the banks, it wasn't because I wanted to: It was crisis management. Their owners had been wiped out, the banks were black holes, they had no equity left, and there was no alternative but to take them over."
He added that foreign observers often confuse Sweden's socialized income distribution and government services with its privatized business environment, leading to inaccurate claims that their government is fundamentally different than other free-market economies. One example of Sweden's privatization chops: The government is refusing to bail out the famed car company Saab this week, as officials say they don't think running an auto manufacturer is within the state's job description.
"From the market liberal's perspective, don't be afraid of Sweden being a socialist example because in this respect we are not," he said. "Governments shouldn't interfere in business life other than to build the legal framework within which our businesses have to work. They should otherwise leave businesses alone and that's what we mainly do."
The Obama administration's initial plans have fallen short, Lundgren said, because they failed to reassure investors that the banking system was genuinely backed by the government and private sector.
"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.