Tuesday, February 03, 2009

Sweden’s Fix for Banks - Nationalize Them - NYTimes.com

In class last Thursday the idea of temporarily nationalizing banks came up. I promised to show how it could work using Sweden's experience from the 1990s. Then I proceeded to forget to post it. So in a better-late- than-never moment, here is an article from the NY Times.

Sweden’s Fix for Banks - Nationalize Them - NYTimes.com:
"With Sweden’s banks effectively bankrupt in the early 1990s, a center-right government pulled off a rapid recovery that led to taxpayers making money in the long run.

Former government officials in Sweden, many of whom come from the market-oriented end of the political spectrum, say the only way to solve the crisis in the United States is for the government to be prepared to temporarily take full ownership of the banks.

Sweden placed its banks with troubled assets into a so-called bad bank, where they could be held and then sold over time when market and economic conditions improved. In the meantime, it used taxpayer money to provide enough capital to allow banks to resume normal lending."
As discussed last week, a key to this is making it temporary AND making sure there is a real downside (loss of jobs, no bonus, or loss of equity) for those who are taking the risks.

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