Bo Lundgren and Lars Hörngren know financial crises. Lundgren was Sweden’s Minister of Fiscal and Financial Affairs during the epic bank meltdown that hit the country in the early 1990s; Hörngren was an adviser to the governor of Sweden’s central bank. Now they both work at the country’s National Debt Office (Lundgren is director general, Hörngren chief economist) and moonlight, Hörngren jokes, as “touring banking crisis consultants.”
They’re in New York for a conference Tuesday on How to Tackle A Financial Crisis: The Case of Sweden in the 1990s. And they stopped by TIME Monday afternoon for a chat. During the conversation I learned two very important things:
1. Lundgren, who in addition to the jobs mentioned above has been leader of Sweden’s center-right Moderate Party and Minister for Sport, actually reads the Curious Capitalist–at least the posts having to do with Sweden and financial crises.
2. Lundgren and Hörngren actually think U.S. authorities have been handling the current financial crisis pretty well.
After the break, some highlights:
Sweden’s banking mess started in 1990 and was pretty much resolved by 1994, after the government took over several of the country’s largest banks. Along the way Sweden had to deal with economic and currency crises far more dire than anything the U.S. has experienced so far. Along with similar troubles in other Nordic countries, it amounted to probably the worst developed-world financial crisis since the 1930s. And then … it was over. Sweden started growing again. Its banks returned to health. Its soccer team made it to the semifinals of the 1994 World Cup.
Lundgren said the Swedish government started by dealing with bank problems on a case-by-case basis–and was repeatedly criticized for failing to take more dramatic action (sound familiar?). Only in 1993 did it enact blockbuster legislation backstopping the entire banking system. But neither he nor Hörngren think that means such a mass bailout is necessarily in the offing here.
“The drastic actions taken in Sweden were with a concern that all the banks were about to go bust,” said Hörngren. “That’s clearly not the case in the U.S. … You cannot draw that strong a parallel to the Swedish situation yet.”
“Hopefully never,” Lundgren added.
Lundgren and Hörngren did agree with the widely voiced criticism that letting a central bank manage a bailout, as the Federal Reserve did in the case of Bear Stearns, is problematic. “This is the taxpayers’ money,” Hörngren said–meaning that people directly accountable to taxpayers ought to be making the decisions. This weekend’s Fannie-Freddie takeover, managed by the Treasury Department with explicit permission from Congress, met that standard.
“Since they obviously had a solvency problem, it was something that had to be handled one way or the other by the government,” Lundgren said.
Why does it have to be handled by the government? “The role of the government is to insure taxpayers and citizens against things they can’t insure against on their own,” Hörngren said.
Now this insurance can on occasion cost taxpayers a lot, but if done right the long-run cost often doesn’t have to be all that daunting. Lundgren took issue with a post in which I had quoted Paul Krugman, who in turn was relying on Carmen Reinhart and Kenneth Rogoff, saying that resolving the Swedish crisis had cost 6% of GDP (the equivalent of $850 billion in the U.S. today). Lundgren said that conflated the cost of the banking crisis with other measures aimed at shoring up a deeply troubled economy, and that the up-front cost of the bank bailout was more like 4% of GDP. Later, after the government had sold off all the bank assets it had acquired in the bailout, this was revised down to about 2% of GDP. “Now they say that perhaps we can even say it’s zero,” Lundgren said.
The key to this success was handling matters quickly, openly and transparently, Lundgren said, adding that U.S. interventions over the past year have generally met that standard. The country that did not come even close was Japan in the 1990s.
“Japan is totally the opposite example,” he said. Instead of acknowledging losses and moving on, Japanese banks and regulators shoved them under the rug and ignored them. “Handling losses the Japanese way is not the way to get banks lending again,” said Hörngren.
Neither sees this tendency at work in the U.S. “You couldn’t compare the way this crisis is handled here with the Japanese way of not handling the crisis,” said Lundgren. So they’re dubious of Krugman’s claim in his column today that, “With each passing month, America is looking more and more Japanese.”
That doesn’t mean they think we’re out of the woods. “The difficult situation would be if banks were to continue contracting lending and you didn’t see any restart of the credit process,” said Hörngren. “What do you do then?”
When confronted with such a situation in Sweden, Lundgren said he got a lot of ideas from the late historian Susan Estabrook Kennedy’s 1973 book The Banking Crisis of 1933. He reread it six months ago. Maybe more of us Americans should be doing the same.