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What democracy looks like when banks go out of control

In the 1980s, Norway and Sweden set aside what had been working for them — democratic socialism — and flirted with neo-liberalism. They deregulated, setting free the financial sectors. The private banks speculated, creating housing bubbles. By the early ’90s, the bubbles burst. Both nations headed into crisis.

In Sweden, 90 percent of the banking sector experienced massive losses. Fortunately, the Social Democrats, the party of the working class, was in power and decided against bailouts. The government nationalized two of the banks, sheltered some that looked like they could survive, and allowed the rest to go bankrupt. Stockholders were left empty-handed.

As it turned out, three of the other large banks were able to raise necessary capital privately. Regulation was re-imposed and Sweden came back strong.

This Swedish version of “tough love” put the economy in such a strong position that when the 2008 financial crisis hit most of Europe, Sweden could use a series of flexible measures that minimized disruption. Its banks had already been cleaned up. Its famous social safety net kept Swedes accessing unemployment insurance, health care, education and job training.

The result: By 2011 the Washington Post was calling Sweden the “rock star of the recovery,” with a growth rate twice that of the United States, lower unemployment and a robust currency.

When Norway’s banks went out of control, the Labor government seized the three biggest banks of Norway, fired the senior management and made sure the shareholders didn’t get a krone.

The now publicly owned banks were given new, accountable management and time to clean up. The government told the rest of the private banking sector that it were on its own: If bankers had money in their mattresses with which they could re-capitalize, fine; if not, they could go bankrupt. There was no way Norwegian citizens would bail them out.

The lesson for Norway’s entire financial sector was unmistakable. No more moral hazard: Risk your own money, not other people’s. Failing banks will be allowed to fail, no matter what their size.

The government gradually sold its shares in the banks it had seized and made a net profit. It kept a majority stake in the largest bank, probably as a safeguard to prevent the bank from being sold to foreign owners.

The St. Louis Federal Reserve Bank’s vice president, Richard G. Anderson, studied the responses of Sweden and Norway to their parallel financial crises: “The Nordic bank resolution is widely regarded as among the most successful in history,” he concluded. By bouncing back through effective governmental intervention, Norway and Sweden avoided the “lost decade” syndrome that dogged Japan after its crash in the early 1990s and that is now the reality for the United States and much of Europe.

For activists in the many countries now confronting austerity programs, these examples can serve as a concrete alternative with a track record of success....

Pwns wrote:Funny how this article touts regulation at the beginning then goes on to mention telling the banks they are SOL if they fail. I wonder how much the Swede's government meddles in deciding who the banks will loan to as well. It's more complicated than whether more regulation or deregulation is the answer.

kalm wrote:

Pwns wrote:Funny how this article touts regulation at the beginning then goes on to mention telling the banks they are SOL if they fail. I wonder how much the Swede's government meddles in deciding who the banks will loan to as well. It's more complicated than whether more regulation or deregulation is the answer.

Agreed. You need smart regulation like Glass-Steagal that prevents banks from becoming TBTF. The problem for us is the perception that Goldman-Sachs gets people elected...that they are the constituency.

UNI88 wrote:

kalm wrote:
Agreed. You need smart regulation like Glass-Steagal that prevents banks from becoming TBTF. The problem for us is the perception that Goldman-Sachs gets people elected...that they are the constituency.

Another problem is that even if we used the Nordic approach, do you really trust the politicians and bureaucrats to do the right things? Would the politicians push for the appointment of competent managers or cronies? Would the bureaucrats run a lean, mean, efficient bank or would they push for more employees and try and grow their personnel empire? Would bank employees need to join a union?

Rob Iola wrote:

UNI88 wrote: Another problem is that even if we used the Nordic approach, do you really trust the politicians and bureaucrats to do the right things? Would the politicians push for the appointment of competent managers or cronies? Would the bureaucrats run a lean, mean, efficient bank or would they push for more employees and try and grow their personnel empire? Would bank employees need to join a union?

Basically, do politicians know more about how to run a bank than bankers? Replacing Mr. Potter with Mr. Smith sounds all warm and fuzzy, but then how is Mr. Smith going to know how to raise and lend capital?

Ibanez wrote:

Rob Iola wrote: Basically, do politicians know more about how to run a bank than bankers? Replacing Mr. Potter with Mr. Smith sounds all warm and fuzzy, but then how is Mr. Smith going to know how to raise and lend capital?

Look at our economy, our government by crisis and fiscal problems. Do you want these 535 people running banks? It worked for Norway, but our Congress wouldn't do a better job.

kalm wrote:

Ibanez wrote: Look at our economy, our government by crisis and fiscal problems. Do you want these 535 people running banks? It worked for Norway, but our Congress wouldn't do a better job.

Pst...guys...most bankers don't know how to manage a mixed market economy and prevent crises either. That's not their job.

88' raises a great question in that no, for the most part I think cronies would be appointed. That's pretty much what has happened with the Obama administration. Wall Street will throw all of it's might at anyone with an inkling of serious reform. However, there are some very shrewd economists out there with experience in banking that recognize the need for smart regulation. Simon Johnson and Mohammed El Erian come to mind.

GannonFan wrote:

kalm wrote:
Pst...guys...most bankers don't know how to manage a mixed market economy and prevent crises either. That's not their job.

88' raises a great question in that no, for the most part I think cronies would be appointed. That's pretty much what has happened with the Obama administration. Wall Street will throw all of it's might at anyone with an inkling of serious reform. However, there are some very shrewd economists out there with experience in banking that recognize the need for smart regulation. Simon Johnson and Mohammed El Erian come to mind.

The real reform comes with the idea that if they fail, then we let them fail. That's the big lesson to take from the Vikings. All the "smart" regulation in the world is no good if you don't have enough people, and smart people themselves, doing the regulating. It's hard to regulate properly when the people being regulated know so much more than the regulators do. But in the end, the idea that a failure will be treated like a failure and that there won't be a 3rd party (i.e. government) swooping in to cover your losses would go a long way to making the risk calculation that much more appropriate.

kalm wrote:

GannonFan wrote:
The real reform comes with the idea that if they fail, then we let them fail. That's the big lesson to take from the Vikings. All the "smart" regulation in the world is no good if you don't have enough people, and smart people themselves, doing the regulating. It's hard to regulate properly when the people being regulated know so much more than the regulators do. But in the end, the idea that a failure will be treated like a failure and that there won't be a 3rd party (i.e. government) swooping in to cover your losses would go a long way to making the risk calculation that much more appropriate.

Mostly agree, but banking is relatively easy to regulate. Gambling is not.