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Barack Obama on Sweden
Read this post; here is Obama speaking:
Sweden, on the other hand, had a problem like this. They took over the banks, nationalized them, got rid of the bad assets, resold the banks and, a couple years later, they were going again. So you'd think looking at it, Sweden looks like a good model. Here's the problem; Sweden had like five banks. [LAUGHS] We've got thousands of banks. You know, the scale of the U.S. economy and the capital markets are so vast and the problems in terms of managing and overseeing anything of that scale, I think, would -- our assessment was that it wouldn't make sense. And we also have different traditions in this country.
Here is a short movie by Ingmar Bergman. Here is a Carl Milles sculpture. Here is some cabbage with your pizza.
Posted by Tyler Cowen on February 11, 2009 at 07:41 AM in Political Science | Permalink
Comments
A question has been bothering me for some time and I have not seen good explation or information around this. Lets stipulate that most of the banks (90%) have toxic assets on their balance sheets with varying sizes. Lets assume that this prevents them from lending the additional Fed money that they are getting.
Question: Why isn't the Fed or some private investor starting new banks. Why aren't new banks with well capitalized balance sheets propping up all over. Theoretically, these banks would be fine from a balance sheet perspective and all we would have to do to get credit flowing is to supply these banks with the money. In the meantime, we would let the bad banks stew, figure out their really issues and go dead/bankrupt?
I suspect that the issue of credit flowing is not simply an issue of banks not having good balance sheets, it also is a function of the fact that the demand for credit has dissipated as consumers have pulled back and are rebuilding their own balance sheets.
But the goal of encouraging new bank creation which theoretically would be safer and sounder should be encouraged? Is their any evidence to see that this is happenning? Are banks being chartered in some corner of the world that we don't know off and will become the new Citibank? Seems like a great business opportunity to me...
Posted by: DP at Feb 11, 2009 7:46:47 AM
It's worth reading the whole interview - I have to say it's pretty impressive. The real test, of course, is whether they take the right actions (and yesterday was not inspiring), but Obama at least seems to be aware of the issues.
Posted by: D2 at Feb 11, 2009 7:59:28 AM
Sorry, no, there shouldn't be carrots in the "pizza salad". Shredded cabbage, olive oil, salt and pepper to taste.
Also, one gets the impression that the Swedish government nationalized all or most of the banks. In reality they only took over two, one who was completely bust and closed down immediately, and one who is still partially government owned.
Posted by: Joe Torben at Feb 11, 2009 8:00:29 AM
I still don't buy it. Cut the heads off the money-center banks. Are we really talking about several hundred effectively insolvent national banks? Is that the implicit acknowledgment? If we can't follow Sweden because the problem is too large, than give us a sense of the real size of the problem. If we aren't willing to because it is politically difficult to sell, find people that can sell it. That is not a good enough reason to take the same failed tact as the Japanese.
Posted by: Steve at Feb 11, 2009 8:11:42 AM
"In reality they only took over two, one who was completely bust and closed down immediately, and one who is still partially government owned."
Obama, of course, tends to make up his facts and the media doesn't bother to check them.
Posted by: Jane at Feb 11, 2009 8:15:26 AM
Also, the link to the Milles statue didn't work for me. Should probably be:
http://lh5.ggpht.com/_xdgEw1YejCg/SHQTflI-6iI/AAAAAAAAACk/8mM9lgc1nsI/s512/DSC01429.JPG
A better (IMHO) statue is this:
http://upload.wikimedia.org/wikipedia/commons/thumb/8/82/Guds_hand_2007.jpg/451px-Guds_hand_2007.jpg
Posted by: Joe Torben at Feb 11, 2009 8:18:15 AM
DP, I think you have a point. Although I suppose that to jumpstart new banks, or let other grow very fast, requires a lot of credit, both in the money sense and in the trust sense. And both are hard to get at the moment...
On a timescale of 5 or 10 years, we could probably see this happen, with the Wells Fargo's and Barclays and smaller unscathed banks taking over the system.
The only players with both cash and trust are governments, and a completely new, government-run financial system to compete with the current one is another step beyond nationalisation...
Posted by: Zamfir at Feb 11, 2009 8:22:03 AM
It's a bit misleading to say that Sweden only had five banks because Sweden only has 9m people. Id the US did proprotionally what Sweden did, they would nationalise over 150 banks. That seems to be a pretty good start. Or what if the US just nationalises a few of the really big banks?
And "traditions" clearly means "not politically possible". When the economy is melting down because of your traditions, it's time to abandon those traditions (at least for a couple of years).
Posted by: Finnsense at Feb 11, 2009 8:25:26 AM
Right now, interest rates are low. Nobody wants to start a bank when interest rates are that low.
Posted by: David Shor at Feb 11, 2009 8:34:34 AM
"And "traditions" clearly means "not politically possible". When the economy is melting down because of your traditions, it's time to abandon those traditions (at least for a couple of years)"
Wrong - don't let the crisis of the moment cause you to abandon good principals. Do you really think the lawyer yahoos on Capital Hill makes good financial decisions? Good Grief, what a notion.
For myself, I am willing to ride out a rough time, letting the foolish investors and execs pay the penalty for their excessive risk taking as a lesson to them and others (knowing full well I will be injured as well), rather than see my country fall to ruinous socialism. To allow the market to correct will make us poorer in the short run. Socialism will make us all poorer and less free in the long run and forever.
Posted by: Jane at Feb 11, 2009 9:00:05 AM
Speaking of Sweden an how much smaller it is that the USA. I wonder is there any talk out there that the USA economy is just too large a part of the world economy and that (barring free banking, which seems politically impossible)
what we need are 4 or 5 currencies and 4 or 5 federal reserves. With maybe10 or so competing FDICs with all run by the federal government but where if they fail everyone gets fired although the tax payer picks up that expense. Though these would all be under one federal government perhaps they could be made incentive compatible. It seems to me that the FDIC should have threatened to pull the insurance of banks who wrote bad loans of who were too leveraged.
Posted by: floccina at Feb 11, 2009 9:02:48 AM
Jane,
Would you really rather have 10 years of stagnation than two years of recession followed by growth? I'm not sure you really grasp what the stakes are here. Neither do I think it helpful to talk about "ruinous socialism" when what you mean is nothing of the sort. Every country in the West gives government some control; some more, some less. The US takes 25% of GDP in taxation (and it will need to be more if the US is actually to balance its books). The UK takes about 36% and Finland about 44%. We're not as different as you clearly like to think.
And by the way, you'll notice this mess wasn't started by the Europeans (barring the far from socialist Brits), even though they are paying the price for it now. The anti-freedom regulations put in place by the French (gasp!) and the Finns to take two examples, mean their banks are fine.
Posted by: Finnsense at Feb 11, 2009 9:24:41 AM
finnsense, the difference between 25% of an economy controlled by central planners and 44% of an economy controlled by central planners is enormous. No damn way do I intend to sit back and let my nation become a socialist hell.
Not sure what you believe really caused "this mess", as you refer to it. As I see it, the current recession in the U.S. was caused by:
1. a central bank which kept real interest rates below zero from 2002 to 2004, inviting the outrageous borrowing and lending practices of the past few years;
2. the implied government guarantee provided to lenders through Fannie Mae and Freddie Mac, a guarantee which the government did make real rather than implied in 2008;
3. the direction by Congress given to Freddie Mac and Fannie Mae to increase loans to low income borrowers;
4. the second foolish action by the central bank in reducing federal funds rate from 5.25% to 2% between 2007 and 2008 - which led to sharp depreciation of the dollar and meteoric rise in oil prices.
If your argument was that the financial crisis started in the a "free market" economy, then I point to those government interventions above as evidence that the cause was exactly the opposite of the free market.
Posted by: John Dewey at Feb 11, 2009 9:45:09 AM
This is clearly a head fake. Obama is actually making rhetorical room for doing the right thing (the Swedish model) without invoking the dreaded N-word. The government is just going to temporarily take over a handful of banks for a while, like Citi, Chase, Goldman, and BoA. There are still thousands of private banks left. See, no nationalization.
Posted by: Dan Kärreman at Feb 11, 2009 9:48:46 AM
"Sweden had like five banks. [LAUGHS] We've got thousands of banks."
Sweden had 114 banks at the time. Source: http://www.nytimes.com/2008/09/23/business/worldbusiness/23krona.html?_r=1
Considering the population of Sweden in 1992 relative to the population of the US now, that would translate into 4000 banks in the US. That's surely "thousands of banks".
(114 / 8692013 * 305788000 = 4011)
Posted by: Erik at Feb 11, 2009 9:49:08 AM
"Sweden looks like a good model"
Here's the deal: It's a model. That means:
1) It worked
2) It can be assessed as you're implementing it
3) It's harder to lobby against
4) It's moral hazard that the bankers fear
5) It will be easier to get out of
TARP is a hybrid. The interests of the banks and taxpayers are not the same. The GAO couldn't even assess it. You can believe that this mess and expense is worth it to avoid actually taking over a few banks, but you're fooling yourself. These banks are wards of the state, and the money we're spending is taxpayer money. We were talking recently about using the stimulus to fool people into thinking things are better than they are or that government is on the case. TARP is fooling everyone into believing that we're preserving some sacred free market principles. Maybe the stimulus will work, even if it is a placebo.
Posted by: Don the libertarian Democrat at Feb 11, 2009 9:52:49 AM
cnbc this morning was saying that sweeden has huge exposure to some smaller eu countries and they cut rates 1% overnight. if the problem gets worse there, will sweeden follow the sweedish model this time?
Posted by: oops at Feb 11, 2009 9:57:21 AM
Hybrid example for today:
http://www.nytimes.com/2009/02/11/business/economy/11react.html?hp
"Washington Hopes ‘Vulture’ Investors Will Buy Bad Assets"
"Another big issue is the price at which the troubled assets would be valued by the banks. While potential investors want to buy as cheaply as possible, the banks might have to take debilitating write-downs if they sold at fire-sale prices. Such an outcome might not be in the government’s — or taxpayers’ — interests.
But competing interests are bound to bedevil this kind of deal, said Campbell R. Harvey, a professor at the Fuqua School of Business at Duke University.
“Given the conflicting objectives, I’m not sure I’d be interested in this kind of altruistic investing,” he said.
And the potential political costs, money managers said, are real. Some managers said that if they did their job well, they could earn double-digit returns and, with them, public scorn.
“We can’t really win,” one private equity executive said. “When we made money, people criticized us. This year, we lost money, and people are criticizing us.”
Posted by: Don the libertarian Democrat at Feb 11, 2009 10:37:36 AM
I hope Mr. Obama makes the same considerations of size and scope when comparing the US to Sweden when the subject of nationalized health care re-emerges in a few years. The same problems exist there also.
And much of Europe may want to blame the US but the US is in far better economic condition than most of those developed economies. While our debt is massive and our taxation is a burden, it's still attractive compared to Germany, UK, Italy, France and Spain. They were on the road to these problems, the economic meltdown just quickened it.
Posted by: Steve Roberts at Feb 11, 2009 10:39:15 AM
With regard to starting new banks the idea being considered here in the UK is to turn the post office into a bank. For years the post office has acted as a point-of-sale for simple financial products provided by either the government (National Savings and Investments) or other banks. You go in, post a parcel, buy some stamps and maybe pick up some home insurance or a credit card. Making the Post Office a full-fledged bank solves the problem of trust (they're considered a safe institution) and ready-made branches and staff.
Posted by: ircharlie at Feb 11, 2009 10:50:26 AM
In the nationalisation debate it’s a mistake to consider the “Swedish model”, or any financial solution in isolation from the real economy. From a financial authority perspective, the Swedish solution may have looked neater, more decisive and organised than the Japanese response.
However it was far less effective looked at from the perspective of the wider economy. Swedish GDP per head did not recover pre crisis levels for 5-6 years and subsequently Sweden went from being one of the premier European economies to a middling one in terms of income per head. By contrast Japanese income per head increased throughout the “lost decade”, suggesting whatever a mess was made of the financial sector, the real economy was left relatively unscathed by this dithering.
Posted by: Giles at Feb 11, 2009 12:00:15 PM
Obama is clueless. He looks to Sweden for leadership.
I've said it for 2 years. Obama is a Marxist.
Anyone seen the light yet?
Posted by: gus at Feb 11, 2009 1:48:56 PM
I've got a simple question for everyone here.
Where the hell did Obama get his "expertise" on banking??
a)Bill Ayers
b)Tony Rezko
c)Jeremiah Wright
or
d)Obama is a completely empty suit with big ears.
Posted by: gus at Feb 11, 2009 1:51:00 PM
Speaking of Bergman - Aspen, Colorado is the new Sweden when it comes to Bergman. A CO supreme court ruling awarded a small historic theater in Aspen the entire Bergman catalog when the Swedish owners reneged on a deal.
Posted by: jason voorhees at Feb 11, 2009 1:59:15 PM
I always get nervous when people start advocating aspects of the Swedish/Nordic model to Anglosphere countries. (There is quite an intellectual cottage industry down here in Australia doing so.)
The Swedish model grew up in a monocultural society with a relatively narrow geographical range. Which means a high level of
(1) common problems,
(2) common perspectives on those problems,
(3) convergent preferences
(4) communications between officials and citizens.
You can make a highly centralised model work in such circumstances. (How well it will do with lots of culturually different migrants? A very good question, the initial experiences are not hopeful.) The Anglosphere countries are, and always have been, much more socially diverse. Hence the liberal model (using 'liberal' in its historical, not weird American, sense) being appropriate to Anglosphere countries.
Indeed, strongly free market economics tends to flourish in culturally diverse countries (the Austrian school and the Danubian monarchy; C18th & C19th Britian-with-Empire, the US) because that people have different preferences is an obvious social fact in such places.
Nationalising banks is a very specific matter, but surely the political trust is not there to do it (perhaps a conservative Republican could get away with it more than a liberal Democrat) in part because Washington does not have a good track record in running businesses. Hardly surprising, since the coordination problems covering a country as geographically, socially and culturally diverse as the US are huge, even without the general problems of public ownership.
I have long thought a big reason why socialism did not get off the ground seriously in the US is precisely because one could not make any plausible case of purposes so common that socialism would even begin to make sense. (Consider the resistance to a unified national health system.)
So, nationalisation as a transitory measure may make a certain amount of sense, but considering how US politics naturally is tends would make it both harder to do at all and harder to do well.
Posted by: Lorenzo at Feb 11, 2009 4:17:22 PM
