“OK…more confusion….turns out the Swedish model that’s been touted (supposedly, this was nationalization) was not the way it’s been described in the media.

Here’s Anders Aslund at the Peterson Institute:

“Sweden did not nationalize its banks. It was Norway that did so, which is an alternative model. In Sweden, a temporary emergency bank authority was set up on the model of the US Federal Deposit Insurance Corporation. It had outside, mainly foreign, consultants to scrutinize all bank debts and establish objectively which were nonperforming. The banks were forced to write off their bad debts and transfer them to bad banks.

Sweden had no aggregator bad bank and the bad banks were not nationalized. Each big bank set up its own bad bank. They were given illustrious names such as Securum, Retriva, Nackebro and Diligentia. Securum was the biggest bad bank belonging to the already state-owned bank, Nordbanken, and it became a separate state company. The private bad banks, however, remained the property of the private banks from which they were removed.

Nobody traded toxic waste at the height of the crisis in Sweden. Such trade is an unnecessary complication. A bad bank is not a bank but a private equity fund, which does not need much capital or recapitalization. Its task is to isolate the rotten apples so that they do not contaminate the good loans in the cleansed banks.

The bad banks sold off their assets at a leisurely pace over several years to maximize their value, avoiding excessive depreciation of assets through fire sales. Any gain was to the benefit of its owners. In this way, Sweden avoided the problem of trading undervalued assets. In the end, even Securum made a small profit.

There is no reason to merge bad banks, because asset sales require plenty of management capacity. A major concentration of assets in an aggregator bank would only aggravate the functioning of asset markets.

The Swedish emergency bank authority divided the banks into three groups. One group consisted of two obviously bankrupt banks, the private Gota Banken and the state Nordbanken. They were merged into state-owned Nordbanken, eventually becoming Nordea, a thriving bank that has been gradually privatized. A second group of private banks, Swedbank and SEB, had too little capital but could be revived. After long negotiations with the state, their shareholders decided to recapitalize them at their own expense, and these farsighted shareholders gained handsomely, although their old capital had been consumed. A third group consisted of private banks in rude health, primarily Handelsbanken, which continued to thrive, but it also set up a bad bank, Nackebro.

Thus, the common American idea that the Swedish bank resolution involved major nationalization is a sheer misunderstanding. Only one failing private bank, Gota Banken, was merged with an equally bankrupt state bank. Sweden avoided private-public partnerships, of which Fannie Mae and Freddie Mac are the most telling and repulsive example, because, as Larry Summers so memorably has stated, public-private partnerships usually means that profits are privatized and losses nationalized.

In sum, in Sweden bad debts were not taken over by the state or transferred to any aggregator state bank; but each bank, private or state-owned, established its own bad bank. The Swedish model avoided the trading of depressed assets in the midst of the crisis, while they were internally valued at their low market value. If nobody can assess the value of an asset, it is probably not worth much. Only one bankrupt bank was nationalized.”

Comment:

So tell me why did Nouriel Rubini and Krugman both claim nationalization was necessary and as evidence cite Sweden? Just a mistake? Notice the line I emphasized in Aslund’s remarks – the centralization of the assets in one aggregator bank would actually cause trouble to the markets. Now, if so, why is that precisely what’s being pushed here….and why is that being palmed off as the Swedish model when Sweden did no such thing?

Is Krugman (as well as Rubini)  selling a plan intended mainly (perhaps only) to create more central control, not because it’s necessary for the financial markets...

Is he using the “Swedish model” meme because it’s great PR? It’s the sort of thing that goes down well with the influential Huffington Post  and the moderate liberal intelligentsia.  For them Sweden is the way things ought to be. (Remember the saw – America is a nation of Indians ruled by a bunch of Swedes – which suggests that regular folk in American are religious like East Indians, but the people who govern them are humanistic and atheistic like the Swedes.

On the opposite side, supporting the anti-nationalization position, there are at least a few disinterested and persuasive voices, like Robert Barro of Hoover.  I don’t call either Summers or Geithner disinterested, obviously, even though they are right on this, for whatever reason. I suspect they may just be playing good cop to Krugman’s bad cop for political play.

Barro writes:

“Periods without stock-market crashes are very safe, in the sense that depressions are extremely unlikely. However, periods experiencing stock-market crashes, such as 2008-09 in the U.S., represent a serious threat. The odds are roughly one-in-five that the current recession will snowball into the macroeconomic decline of 10% or more that is the hallmark of a depression.The bright side of a 20% depression probability is the 80% chance of avoiding a depression. The U.S. had stock-market crashes in 2000-02 (by 42%) and 1973-74 (49%) and, in each case, experienced only mild recessions. Hence, if we are lucky, the current downturn will also be moderate, though likely worse than the other U.S. post-World War II recessions, including 1982.

In this relatively favorable scenario, we may follow the path recently sketched by Federal Reserve Chairman Ben Bernanke, with the economy recovering by 2010. On the other hand, the 59 nonwar depressions in our sample have an average duration of nearly four years, which, if we have one here, means that it is likely recovery would not be substantial until 2012.

Given our situation, it is right that radical government policies should be considered if they promise to lower the probability and likely size of a depression. However, many governmental actions — including several pursued by Franklin Roosevelt during the Great Depression — can make things worse.

I wish I could be confident that the array of U.S. policies already in place and those likely forthcoming will be helpful. But I think it more likely that the economy will eventually recover despite these policies, rather than because of them.”