Global Financial Crises, Part II: Norway 1987

Yesterday, we looked at 5 Historical Economic Crises and the USA.

Neg_ratesThat discussion led to a reader in Norway referring us to this 2005 commentary about the Norwegian Financial Crisis, which began circa 1987. It was the first systemic crisis in a major industrialized country since the 1930s.

As the nearby chart shows, Real Interest rates in Norway were negative from 1980-84. The crisis hit five years later.

In the United States, real interest rates were negative between 2002-03. The crisis hit five years later. (Real Interest rates just flipped negative again in 2008).

The Norwegian banking crisis had several features which will look familiar to any observer considering the present deterioration of the US financial situation. Both can be described as classic boom-bust crises, containing several universal features:

Long Island Financial Iced Tea

• Deregulation and liberalization paved the way for the boom
• Macroeconomic policies were largely pro-cyclical
• Lending growth became exceptionally strong
• Prudential capital regulations were relaxed
• Regulatory/Supervision efforts were reduced

The author notes these five factors was "a deadly cocktail." We seem to have drunk the same heady and dangerous brew here in the US. I call it a Long Island Financial Iced Tea — five liquors mixed with reckless abandon, invariably producing a pounding hangover.

I suspect where there will be significant differences in the manner of how the two crisises will be resolved. The Norwegian crisis resolution contained five features:

Norwegian Hangover Cure

• Private solutions were explored before the government intervened.
• Share capital was written down to zero before committing public funds.
• The government acted swiftly to limit contagion, but did not provide a blanket guarantee.
• Liquidity support was given to illiquid, but solvent institutions.
• The government did not use an asset management company.

This is a rather intriguing guide to resolving the current sub-prime debacle. Note that the Norwegians avoided any moral hazard, refused to bail out speculators. It will be interesting to see  if the US can follow a similar path — especially with the monoline insurers. Will share capital be written down to zero before committing public funds in firms such as Ambac (ABK), MBIA, FGIC ?

The alternative leads us to a situation where grossly speculative profits remain private, but systemic risk is public. This would be a wholly unsatisfactory conclusion.


A Norwegian perspective on banking crisis resolution
Kristin Gulbransen
Norges Bank, 16 June 2005
Conference on Banking Crisis Resolution – Theory and Policy, Oslo

Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. Barry Ritholtz commented on Feb 10

    Way too wonky for a Sunday morning, no?

  2. Quiddity commented on Feb 10

    What is meant by “share capital”?

  3. EDF commented on Feb 10

    “The alternative leads us to a situation where grossly speculative profits remain private, but systemic risk is public. This would be a wholly unsatisfactory conclusion.”


  4. lurker commented on Feb 10

    Obviously the Norwegians lack our effective lobbying system and Wall Street (GS) to Washington career path. In short, the average American is screwed. But not to worry, our “elected” politicians will put a lovely spin on it all.

  5. Ross commented on Feb 10

    The Vikings got it right.

    The problem will be how we determine who is solvent. Liquidity can sometimes mask who is truely broke. Citi comes to mind circa 1990.

    Another solution would be to nationalize the insolvent, write down the share capital to zero, re-capitalize the institution and re-float the shares to the public. I do-over.

    The equity and junior debt holders are the bag men. Using public money up front and recouping at a later time might work.

    Call it a Pavlovian solution. Bad management, bad equity holders…… biscuit.

  6. Ken commented on Feb 10

    I am new to this site, also just five years studying the markets, and completely new to having interests in politics. This time I need to know as much as possible, so I’m asking…

    Does Ron Paul’s monitary policies make sense?

    I like what I hear from Ron, but, can I ask that on this site? How to you feel?

  7. cinefoz commented on Feb 10

    Time to return the compliment … this is one of your best posts in a long time. Rather than shouting that the sky is falling, you presented problem, an explanation that didn’t rely on ‘what everybody knows’, and a solution.

    Where can I find references on the non-Japanese macroeconomic problems?

  8. Bram commented on Feb 10

    Maybe it’s unneccesary to say, but the Norwegian Financial Crisis of 87 produced alot of personal economic ruin among normal people. Solely because of declining housing market coupled with rising uneployment.

    In Norway it is not possible to ‘Walk Away’ from debt. Norwegians ending up with foreclosure have to pay back all of the original loan, with interests, regardless of how much the house sold for.

    The common opinion among the Norwegians is therefore that the banks were let of easily, while private people with houses were the big loosers. The fact that the government also took away some of the tax-reduction for interest on mortgages as part of the crisis management made matters worse.

    ‘Walking Away’ in the American housing market is going to have unexpected and severe consequences for someone. If the individual home owners are not taking the bills, who are?

  9. Winston Munn commented on Feb 10

    Meanwhile, back at the ranch….

    The solution in the U.S. will be determined by which party wins the elections.

    If the Republicans win, the bailout will be to ensure businesses have the financing they need to provide good jobs.

    If the Democrats win, the bailout will be to protect the children.

    If Ron Paul wins, he’ll be sent to Norway.

  10. Groty commented on Feb 10

    Thanks to you for the summary, and to your reader who provided the link.

    The author of the linked content took a complex event and made it easy for a layman to understand, and then you refined it even more.

  11. usausausa commented on Feb 10

    Luckily this is the US and not Norway or Finland or Spain or Japan or Sweden. There’s no comparison here. The US will be fine.

  12. edhopper commented on Feb 10

    “Does Ron Paul’s monitary policies make sense?
    I like what I hear from Ron, but, can I ask that on this site? How to you feel?”

    If you think the Government should stop all social programs and remove the saftey net. And if you believe in regressive taxes that fall hardest on the poor. Then Ron Paul’s economic policies make sense.

  13. Mark Hessel commented on Feb 10

    Good post. Quickly checking the current relative numbers
    comparing the US and Norway via the CIA factbook, I see
    the following.


    GDP* – $284 billion (2007 est.)
    GDP (growth rate) – 4.9% (2007 est.)
    GDP per capita – $55,600 (2007 est.)
    Unemployment Rate – 2.4% (2007 est.)
    revenues: $232.3 billion
    expenditures: $158.4 billion (2007 est.)
    Public Debt – 39.1% of GDP (2007 est.)


    GDP* – $13.75 trillion (2007 est.)
    GDP (growth rate) – 2.2% (2007 est.)
    GDP per capita – $46,000 (2007 est.)
    Unemployment Rate – 4.6% (2007 est.)
    revenues: $2.568 trillion
    expenditures: $2.731 trillion (2007 est.)
    Public Debt – 39.1% of GDP (2007 est.)

    GDP – official exchange rate

    Norway appears to have the advantage. Seems like
    this a template worth following.

    Note: I’m not sure how well these numbers can be trusted.
    The factbook stated public debt for the US is 39.1% or
    $5.3 Trillion. I thought our debt was over $9 trillion.

  14. Kolya commented on Feb 10

    “The alternative leads us to a situation where grossly speculative profits remain private, but systemic risk is public.”

    Aren’t we already there? Annualized Tbill rates over the last 5 years = CPI. After tax most folks are losing the purchasing power of their savings. Meanwhile all those who rely on cheap financing get wealthier. We might as well institute a tax on bank accounts. The proceeds could then be given to hedge funds and homeowners – the effect would be the same.

  15. Mark Hessel commented on Feb 10

    These numbers do indicate that
    Norway is taxing the hell out
    of there citizens.

    GDP – 284 billion
    revenue – 232.3 billion

    Not sure if I can trust the CIA.

    Thanks for the Japan bank post Stuart.

  16. Al Czervik commented on Feb 10

    “The alternative leads us to a situation where grossly speculative profits remain private, but systemic risk is public. This would be a wholly unsatisfactory conclusion.”

    “Aren’t we already there?”

    “Obviously the Norwegians lack our effective lobbying system and Wall Street (GS) to Washington career path.”

    And so the number one topic of discussion among the elite right now is not so much “should we do it?” but “can we get away with it again this time?”.

  17. Winston Munn commented on Feb 10

    It amazes me that we keep chasing our tail with no hope of ever catching up.

    Interest-rate manipulation is nothing more than time alteration. Artificially low rates and easy debt access simply compresses the time of normal economic actions – by attracting future buyers to act earlier, there is no real economic growth but only future growth borrowed.

    When the time arrives to repay the borrowed growth, we ask the central bankers to fix the problem with the same solution that was its cause.

    And round and round we go.

    I am reminded of the solution found by the computer in the movie WarGames: “The only winning move is not to play.”

  18. Street Creds commented on Feb 10

    Just imagine if Norway didn’t have gobs of $91.00 oil to export.

  19. kk commented on Feb 10

    A good overview of Norway’s petroleum based economy and socialist type leanings along with reviews of other petro-economies is below:

    From Slate Magazine:

    Norway has pursued a classically Scandinavian solution. It has viewed oil revenues as a temporary, collectively owned windfall that, instead of spurring consumption today, can be used to insulate the country from the storms of the global economy and provide a thick, goose-down cushion for the distant day when the oil wells run dry.

    Less than 20 years after they started producing oil, the Norwegians realized their geological good luck would only be temporary. In 1990, the nation’s parliament set up the Petroleum Fund of Norway to function as a fiscal shock absorber. Run under the auspices of the country’s central bank, the fund, like the Alaska Fund, converts petrodollars into stocks and bonds. But instead of paying dividends, it uses revenues and appreciation to ensure the equitable distribution of wealth across generations.

    Here’s how it works. Cash flow from the government’s petroleum activities—the state owns 81 percent of the aptly named Statoil—is funneled into the fund. Last year, the total came to 91.9 billion kroner (about $14 billion). The fund then hires external managers to invest, generally using low-cost indexing strategies. It’s conservatively managed—more bonds than stocks, and investments divided equally between Europe and the rest of the world. (Here are the results of six years of active management.)

    Of course, the fund’s history reveals some of the pitfalls of having socialists manage oodles of cash. The fund didn’t start to invest in stocks until 1998, thus missing out on a big chunk of the boom. In 2001, it started a sub-fund to make eco-friendly investments—good social policy, dubious asset-management strategy.

    But the huge balances mean Norway can happily continue to be heavily socialist without confronting the problems that its Euro-neighbors to the south face—unemployment, high inflation, and huge national debts. Yes, fiscal budget expenditures were a whopping 38.3 percent of gross domestic product in Norway last year. But the country still runs a budget surplus. Last year, per-capita GDP was a healthy $51,755, and both unemployment and inflation are low.

    In Norway, the sudden increase in oil prices has meant larger inflows to the fund and enhanced long-term welfare for its citizens. That’s not how it goes down in other big oil producing countries. In Russia, the oil boom has enriched oligarchs and increased foreign currency reserves. But the quality of life in Russia continues to deteriorate. Saudi Arabia has been pumping far more oil than Norway and for a far longer time. But its oil revenues tend to flow into the bank accounts of the royal family—not into a segregated account to benefit the public at large. As a result, the richest oil nation on earth still resembles a garden-variety poor country: a 25 percent unemployment rate, tremendous inequality of wealth and assets, a massive public debt, and an undiversified economy dependent on commodity exports.

  20. Detlef commented on Feb 10


    the OECD statistics say that public revenue in Norway 2005 was around 45% of GDP. So that CIA number definitely makes no sense.

    Unless – perhaps – they´re counting Norway´s oil income in some way? I seem to remember that Norway got a state owned fund where part of the oil profits get invested for the future. With the high oil prices in the last few years, that might account for the difference in numbers?

    And your question about “public debt for the US is 39.1% or $5.3 Trillion”. I seem to remember that there is a difference between “public debt” ($5.3 trillion) and “all federal debt” ($9+ trillion). If I´m right, public debt for example doesn´t include federal debts owned to other federal departments.

    As in Social Security.
    The trustee report for 2006 says that Social Security and Disability Insurance had around $2 trillion “invested in interest-bearing securities of the U.S. Government”.
    Not owned by “the public” and not traded/auctioned to the public.

  21. Shane commented on Feb 10

    “If you think the Government should stop all social programs and remove the saftey net. And if you believe in regressive taxes that fall hardest on the poor. Then Ron Paul’s economic policies make sense.”

    You sir, obviously haven’t spent much time, if any looking at Paul’s positions.

    Please tell me what is less regressive than NO income tax.

    If you believe that an individual should be FORCED to spend his time and labor (welfare comes from taxes which comes from MY labor) to provide for someone else, then he makes no sense.

    I personally believe in the freedom of the individual, if he wants to take all his money and blow it on drugs, or big TVs so be it, if he wants to voluntarily give it to charity, good for him.

    No one individual should be FORCED to subsidize someone else’s living-that’s a form of slavery.

  22. donna commented on Feb 10

    Beautiful fjords!

    Lovely little crinkly bits….

  23. Cherry commented on Feb 10

    Shane, you represent ignorance and why Ron Paul and his Enlightment crock suck.

    The fact he tries to appeal to “rural americans” and bends his “libertarian” beliefs to do so is sickening. Hypocrit at its worst.

    The fact is, Paul’s beliefs are anti-nationalistic and anti-American as they come. He wants to sell America to Internationalism as much as a Marxist would, if not more.

    Paul’s belief in a “free market”(doesn’t exist in nature) and “financial institutions” is outright shadow outsourcing of the American soul. A bleak descent into the night.

    The fact is, without programs Paul hates, America would be much less healthy, more unrefined citizenry wasting away, increase in crime would be ASAP, especially among the black the populations who would FLOCK to the gangs which the MIC would happily arm. Yeah, some would die, but not nearly as many hoped.

    Capitalism is not a American tradition. Sorry, it isn’t. Capitalism is a International theory forced on the American population by the Enlightment intellectuals who hated Western Civilization as much as their brothers………. the Illumanti. I see the same thing with Socialism as well. Trying to nationalize it into the cultural framework. Sorry, it doesn’t work. I know what you are.

    America is 2 sides of a thorn. The benefit of the enlightment in liberty and pursuit of happiness, but the ugly theories that came off such as Capitalism and Socialism have made a mockery of the traditional order of Western Civilization.

    Time for the middle class to take a backseat and let the natural elite do what we do best: organize and create efficiency for a nation. You have made a mess Mr.Merchant.

  24. Citizen Bagholder commented on Feb 10

    Our government has already begun to bail out speculators. We would have had our banking crisis last August had the Federal Home Loan Banks not loaned many billions to the mortgage banks, 50+ billion to CFC alone. The taxpayers will eat these losses and many more. I am beginning to believe that our brain-dead government will readily destroy the dollar and our savings in a vain attempt to shore up our deeply corrupt and insolvent financial institutions.

  25. Roger Bigod commented on Feb 10


    You might be better off reading a standard intro economics text on the issues of the gold standard v. fiat money. This would be wiser than trusting the opinions of a random set of blog posters, even ones as discerning and knowledgeable (I say modestly) as the readers of the Beeg Peekture.

    The quick answer is that all the big, successful economies use fiat money and a managed money supply and there’s general agreement that it works, assuming honesty and competence on the part of the authorities and big banks. An analogy would be commercial aviation, which we accept despite obvious dangers and costs. We don’t expect to learn that the radar operators are having a mass Long Island Iced Tea party while all the control towers have been taken over by squads of a death cult. Not that this comparison has anything to do with the financial markets, of course.

  26. fender commented on Feb 10

    The economies of Norway, Finland, Sweden and especially Spain shares a common fundamental property: these economies are extremaly intervened economies. The spanish economie is a “cortijo-economie”.

    I ignore what is de situation of japanese economie.

    (I apologiza for my horrid english)

  27. Roger Bigod commented on Feb 10


    Most Americans speak horrid English, so we’re very tolerant of it.

    There’s a good book by a man named Kildelberger about Bubbles and Crashes, covering many countries over a few centuries. The phenomenon happens even when the economy is tightly managed. Sometimes the authorities went to the same elite schools as the major private players and hate to discipline their friends. Sometimes they just get swept up in the apparent success of the boom.

  28. Francois commented on Feb 10

    “”The alternative leads us to a situation where grossly speculative profits remain private, but systemic risk is public. This would be a wholly unsatisfactory conclusion.”


    But I’ll bet you my entire portfolio that it’ll be the ONLY conclusion that will predominate on Wall Street and in DC. If hedge funds can bribe the most important Democrat in the Senate to swallow that it’d be bad for the economy to tax them at the same rate at the waitress making 2 x the minimum wages, what in the world can one expect when every asshole with big chuncks of moolah will ask for a bailout?

    They’ll get their bailout of course! Remember, government favors are classified as handouts ONLY when it benefit the working stiff. Wh
    en it favors the political donor class, it is called wise economic management or pro-growth initiative.

    Now, if you will excuse me, I need to use yet another of these airbaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaags.

  29. Johnny Vee commented on Feb 10

    Barry! If your looking to Norway for economic solutions- You’ve lost your mind.


    BR: You can choose to ignore the significant parallels between the five major 20th century structural financial crises and that of our own.

    I don’t.

    I prefer to identify what they all had in common, and objectively seek pragmatic solutions.

  30. briatx commented on Feb 10


    Do you have any sources for you claims about Ron Paul, or are you making it up as you go along?

    You seem to be taking the worst stereotypes of Libertarians and crony capitalist Republicans and sticking it to Paul without any bother to check your claims.

    Ron Paul is the strongest defender of US national sovereignty in these 2008 primaries. If you bothered to check his positions, you would see:

    For free-trade, yes, but anti NAFTA and CAFTA (says they’re managed trade, not free trade)

    Anti North American Union (NAU) and NAFTA Superhighway. Most people still think this is loony tin foil stuff, but if people bothered to check sites like on the Trans-Texas cooridor they would see that the highway at least is real.

    He wants a non-interventionalist (this is NOT isolationist) foreign policy. It means we would stop policing the world, bring our troops back home to defend the actual nation rather than waste blood and treasure trying to “fix” the world. What could be more nationalistic and pro-America?

    Oh, if you can’t tell, these are all “anti-internationalism” policies.

    The programs that Paul hates are all recent developments. The federal reserve, income tax, social security, medicare, and federal intervention at all levels of government (state and local). And a lot of your basic services, like police, and public schools were the sole duties of LOCAL and STATE government. They did not have Federal involvement until RECENTLY, with acts like No Child Left Behind (did it make our schools better?) or the Department of Homeland Security funding police (are we actually safer?).

    The idea here is that its none of the Federal governments business, but the states can have all the programs they want to tax and pay for.

    Anyway, I don’t know where you get your information, but it seems to me you have everything backwards.

    The elites created this mess, and the elites will bail themselves out at the expense of the people — like usual. And the solution will probably involve something that no proud American would want or agree to in normal times, but reluctantly concede because theres a freaking crisis going on.

    Just wait.

  31. Francois commented on Feb 10

    “Barry! If your looking to Norway for economic solutions- You’ve lost your mind.”

    Anyone looking to Wall Street for economic solutions cannot lose his mind…because they never had one to begin with!

  32. Francois commented on Feb 10

    @johnny vee:

    “If your looking to Norway for economic solutions- You’ve lost your mind.”

    And pray tell what is so horrible with Norway, apart from the fact that they’re not the US of A?

  33. larry commented on Feb 10

    Reading the weekend WSJ yesterday and finding that the story of a 46 yr old woman in Kansas who had smuggled a 26 yr old murderer out of prison made me think that we will be having a hard time getting any decent business news from them from now on. Trying to determine how deep our recession will be? Hell no! Give them some stories about brain dead horny 46 yr old women. Three pages? My god!

  34. Mark Hessel commented on Feb 10

    Thanks Detlef.

    The CIA fact book says Norway’s
    debt is 39.1% of GDP (2007 est.).

    Interesting about internal vs.
    external debt. Seems to me that
    if money is owed (i.e. take from some
    internal account surplus,) it should count
    as debt. Enronish.

  35. Shane commented on Feb 10

    You must be smoking some good stuff, ‘cuz I have no clue where you’re coming up with some of that stuff-maybe you just pulled it out of your rear—briatx had a good response.

    As Roger Bigod stated it would be wise to read up on some economics-if you haven’t already. I do have a couple of points however, remember when you do economic reading-things are always biased (econ. isn’t so cut and dry). Also take into account that history books are always written by the winner.

    In order to understand where Paul comes from on economics, start reading about the Austrian School of Economics, there are some excellent books available for download for FREE :-), from Von Mises, such as Causes of the Economic Crisis, or Murray Rothbard-America’s Great Depression, or History of Money.

    Fiat money as a “world-wide” agreement has only been around for about 60-70 years. It has “worked” so far, however a quick look at the past 60 years, and further back to those who used it before then reveals a different story. It is the Austrian belief that any fiat currency will ultimately fail. To my knowledge, off the top of my head, the only fiat currencies not to undergo significant re-evaluations in the past 30-40 years are the British pound and the U.S. dollar, Canadian dollar-there might be others, but not many. People might claim the US dollar has been good for 100+ years, I disagree, I think there was a significant re-evaluation in the 1970s when dollars were no longer printed with “redeemable in silver” on them.

    Paper money was experimented with in the colonial period, and during the Civil War, both with completely disastrous results. Even the Great Depression to a large extent was the result of paper money. Whenever people allow the government to be the provider of money, especially through the printing presses, bad things will result.

    Anyone who believes that the government will save us, or we should trust in the government-or trust the Fed, they know what’s best, would do well to remember this quote.

    “Government is not reason; it is not eloquent; it is force. Like fire, it is a dangerous servant and a fearful master.”
    ~George Washington

  36. Mike G commented on Feb 11

    Sounds like Norway went with a more responsibility-based, less ‘socialist’ solution than the privatized-profits-socialized-losses Wall Street/DC corrupt cabal currently screwing us with our own money.

    Barry, this financial situation also reminds me of Australia in the late 80s-early 90s, would like to see an analysis of that.

  37. David commented on Feb 11

    Dude. The real question is what happened to Norwegian home prices during that period.

  38. Don commented on Feb 11

    Whoever wanted a good starting reference for understanding monetary systems, Milton Friedman’s “Money Mischief” is excellent. It is a history book as much as an economic text, and focuses on money in all its various forms.

    Be aware that Uncle Milty never has had much faith that governments everywhere and today won’t do what they’ve always done when faced w/ the need or desire for more revenue, i.e,. debasing the currency in lieu of raising taxes, i.e., promulgating inflation to create the illusion of wealth. This is as true of fiat currency (which in fact makes it much easier–just fire up the presses!) as it is/was of metals-based currency, where a gold or silver coin would gradually lose all of its gold or silver.

    In any case, it is an excellent, non-technical overview of what money is, and of some of the shenanigans to which it has been put to use by the governments that create it.

  39. Estragon commented on Feb 11

    What sets the current US situation apart from the others is the status of the USD as a reserve currency, and the related ability of the US to borrow in its own currency. This difference is likely to be critical in how this plays out.

    My guess is foreign holders of US debt will take much of the pain through inflation and/or currency depreciation, and the US will appear to have dodged the bullet. This outcome, however, only sows the seeds of the next disaster.

  40. Roger Bigod commented on Feb 11

    The irony is that the current zapping of the currency isn’t being carried out by socialists or hippie live-for-today hedonist, but by righteous conservatives who pay lip service to Friedman. Either way, people tend to be seriously ticked off when their savings evaporate.

    Welcome to the Weimar Republic.

  41. Shawn H commented on Feb 11

    Does anyone really believe that Hank and his criminal contingent would do anything but socializing the losses? They have already done so, allowing the FHLB, FNM, FRE, FHA, etc, backstop all mortgages to keep rates artificially low…the National Association of Realtors wielding it’s vast power.

    Most recently, Ben has effectively replaced responsible government lending (Fed repos) with permanent risk assumption of any and all toxic collateral (indefinite rolling TAF auctions). Outstanding repos $15B, outstanding TAF $60B. I’m sure everyone knows an illegal with 10 investment properties who is doing 10 cash-out refis before heading back to Mexico. Instead of stopping this, Ben ignores it and simply assumes the risk for these mortgages via the TAF. Hell, CFC was still doing stated loans in December 2007, even as they were nearing bankruptcy.

    The real solution, to stop the irresponsible lending, is not being applied whatsoever. Nope, that would piss off the true power in the U.S., the NAR and Wall St. Instead, they keep lending and simply socialize the mounting losses, while still lending and lending and lending.

  42. ReadABook commented on Feb 11

    The arguments I’ve heard hear attacking Ron Paul’s policies are not even based in reality. Try reading a book sometime before attacking someone you know zero about. Start with Ron Paul’s book “Pillars of Prosperity” and then get back to us with your criticism. I’m so tired of lame arguments from the uninformed and the misinformed.

Posted Under