Go Swedish, part 47

For many years, I have been an advocate of going Swedish. In addition to a surplus of beautiful Scandinavian blondes, Sweden understands what to do in a financial crisis.  They do not rescue banks, they rescue the banking systems. They do not bailout creditors but instead, ensure credit can move freely through the economy. Lastly, they do not place the burden of failure on taxpayers, but rather leaves it where it belongs — with bond and equity holders.

The Washington Post discussed this truism last week in an article titled Five economic lessons from Sweden, the rock star of the recovery.

What were those five lessons?

1. Keep your fiscal house in order when times are good, so you will have more room to maneuver when things are bad.

Prior to the 2008-09 recession, the U.S.and Britain had budgets deficit equal to 3% of GDP. Sweden had a 3.6% surplus. Sweden’s gross debt is ~45% of its economy; the US is nearly 100%. This left the government with lots of flexibility to engage deficit spend when the economy hit a crisis.

2. Fiscal stimulus can be more effective when it is automatic.

Sweden’s response to the crisis was provide income, health care and other services to people who are unemployed. That prevented a paradox of thrift from making a minor redcession something much worse.

Their spending programs cushioned economic blows, and can be designed to taper off when the economy turns.

3. Use monetary policy aggressively

As aggressively as the Federal Reserve has responded to the financial crisis, the Swedish central bank was even more aggressive. The Riksbank lowered its target short-term interest rate nearly to zero, but it expanded the size of its balance sheet even more than the Fed did relative to the size of its economy. In the  summer 2009, the Riksbank balance sheet was more than 25% of GDP. The Fed, never got over 15%. And, Sweden was much faster to normalize their footing versus the Fed, who is still zero bound. Swedish central bank have already raised rates.

4. Keep the value of your currency flexible.

The Swedish krona was a helpful buffer against the economic downdraft of the past few years. It fell in value against both the dollar and the euro during the crisis, making Swedish exporters more competitive.

5. Bankers will always make blunders; just make sure they don’t doom the economy.

Swedish banks made mistakes, just like the rest of the world. But their losses were more manageable. And due to their crisis in the 1990s, where Sweden’s major banks were temporarily nationalized, Bankers were not cushioned from the consequences of their unwise decisions. They did not learn the ruinous lesson of privatized profits and socialized losses that US Bankers have turned into a motto.

The threat from Moral hazard


Time to Get Swedish (January 23rd, 2009)

We Should Have Gone Swedish . . . (September 22nd, 2010)

Five economic lessons from Sweden, the rock star of the recovery
Neil Irwin
Washington Post, June 24 2011

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