Friday, May 20, 2011

The Swedish Solution: Sweden’s Bank Bailout versus Japan’s and the US’s

Asset bubbles are a perennial curse in unregulated or poorly regulated financial markets. They are a plague on modern capitalism. But such bubbles, especially ones financed by excessive private debt, were minimized in the period from 1945–1979 when most countries had an effective system of financial regulation.

With the advent of neoliberal/revived neoclassical financial deregulation and liberalization over the past 30 years, asset bubbles and debt deflation have become serious problems again all over the world.

The first major victim was Japan, where ill-advised financial deregulation in the 1980s set Japan up for its massive property bubble that burst in 1991, leading to the lost decade. The US and other countries have now been hit by a similar disaster: bursting housing bubbles financed by high private debt, and leading to debt deflation and private sector balance sheets in a terrible state.

The bailouts in 2008 in the US and the UK and other nations have been widely criticised, and a far better type of bailout was employed by the Swedish government for its financial crisis in 1992. In Sweden, financial deregulation in the 1980s caused a flurry of real estate lending by Swedish banks, and when the bubble finally popped in 1991 and 1992 there was a major economic contraction. Bank failures and a financial crisis occurred. The Swedish solution? Here it is as described in the New York Times:
“Sweden told its banks to write down their losses promptly before coming to the state for recapitalization … later in the decade, Japan made the mistake of dragging this process out, delaying a solution for years …. By the end of the crisis, the Swedish government had seized a vast portion of the banking sector, and the agency had mostly fulfilled its hard-nosed mandate to drain share capital before injecting cash. When markets stabilized, the Swedish state then reaped the benefits by taking the banks public again …. Soon after the plan was announced, the Swedish government found that international confidence returned more quickly than expected, easing pressure on its currency and bringing money back into the country.”
Carter Dougherty, “Stopping a Financial Crisis, the Swedish Way,” New York Times, September 22, 2008.
This type of bailout and cleaning of the financial system was far superior to Japan’s failed bailouts in the 1990s and the US bailout of 2008.

More information on this can be found here:
Peter Thal Larsen and Chris Giles, “Self-assembly solution,”, March 18, 2009.


  1. Can you do post on the whole Japan crisis? I've always thought it was the Plaza accord that caused it. That said I'm a layman who knows nothing about it.

  2. Not a bad idea. The Plaza Accord and the appreciation of the yen was one factor in Japan's problems in the 80s, though not the whole story