The reports keep coming (and they started, sort of, right here on this blog) that Treasury is putting together a plan that will involve recapitalizing banks (in exchange for equity stakes), temporarily guaranteeing all deposits, and guaranteeing all bank debt maturing in the next 36 months or so. There’s talk in D.C. that they may make some kinda big announcement on it today. (Update: Now the talk is probably not today.)
What this amounts to is the Swedish solution–a plan of action nearly identical, albeit it of course on a much larger scale, to what the Swedish government undertook during a banking crisis in 1993. And while I certainly am not gonna take credit for introducing this idea (the Swedes should get that, and they in turn give some of it to Franklin Delano Roosevelt and his bank rescue in 1933; plus some guy at the Cleveland Fed wrote a paper on “The Swedish Experience” [pdf] more than a year ago), there was a time early this year when I and Merrill Lynch’s David Rosenberg were about the only people discussing it as a legitimate possibility and others seemed to think we were a little nuts. Wrote Paul Krugman back in March:
Justin Fox suggests that we learn from the way Sweden dealt with its financial crisis at the beginning of the 90s. I’m looking into it.
What Justin doesn’t mention, however, is that (according to Reinhart and Rogoff [pdf!]) the resolution of Sweden’s financial crisis imposed a fiscal burden — that is, required a taxpayer-financed bailout — equal to 6 percent of GDP. That would be $850 billion in America today. Just saying.
[A]n $850 billion price tag attached to a cleanup that resolves most of the current credit problems, wipes out the shareholders of insolvent institutions, and leaves us with a more rational regulatory setup (as the Swedish bailout seems to have done) actually sounds like a pretty good deal to me.
I’ll stand by that. And if Treasury needs any advice on exactly how to proceed, Stefan Ingves, one of the main behind-the-scene architects of the Swedish rescue, is in Washington for the IMF-World Bank meetings (he’s now head of Sweden’s central bank). So is Bo Lundgren, who was Sweden’s Minister of Fiscal and Financial Affairs in those days and now runs the Swedish National Debt Office. I have Lundgren’s cell phone number in case Hank Paulson needs it.