Sunday, March 01, 2009
Opinion

Nationalizing U.S. banks and the truth about Sweden

"When the Swedes fixed their banks, they did so by following a distinctly American model—not by nationalizing them."

By Stephanie Ramage

On the morning of Sept. 30, 1999, during the Clinton Administration, the New York Times reported the following: “Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders. The action … will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans.”

This was part of the Clinton Administration’s supposed economic equality plan, carried out by Fannie Mae head Franklin Raines, to create more American homeowners—not by promoting a sound economy, but by lowering the standards for loans. Some banks expressed concern, but the White House was calling the shots and Fannie Mae was backed by the federal government. What could possibly go wrong? The private sector signed on.

Subsequently, the Times continued, “banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers … borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans. … In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980s.”

That is precisely what happened in 2008. It was government-subsidized Fannie Mae and Freddie Mac’s bad loans—because they propped up about half of all mortgages in the U.S.—that poisoned Wall Street and brought on the foreclosure epidemic.

Now, even as the country suffers the fallout of the Fannie Mae disaster, there is giddy talk about trading free-market risk for the alleged safety of the federal government by nationalizing American banks. Given the cautionary tale of politicians using Fannie Mae for their own purposes, we should all be wary of even the whiff of nationalization.

Yet, a couple of weeks ago, American economist Nouriel Roubini penned a column for the Washington Post titled—much to the delight of Arianna Huffington’s chattering clubhouse—“Nationalize the Banks! We’re All Swedes Now.” In it, he praised how, in the 1990s, Sweden’s banks were “nationalized,” cleaned up by the government, and handed back to the private sector.

Were they really?

According to Swedish economist Anders Aslund, who lived through his country’s bank “nationalization,” that wasn’t quite what happened.

Last week, on the RealTime Economic Issues Watch blog of the Peterson Institute for International Economics, Aslund explained that “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 U.S. Federal Deposit Insurance Corporation.”

When the Swedes fixed their banks, they did so by following a distinctly American model—not by nationalizing them.

So, Roubini and the Huffington camp are advocating that we fix America’s banks by copying Sweden copying America? Well, OK, but wouldn’t it be more efficient to just copy ourselves copying ourselves?

Anders adds that Sweden’s knockoff of America’s FDIC “had outside, mainly foreign, consultants to scrutinize all bank debts and establish objectively which were nonperforming.”

From there, the Swedes took the very organized route—which the U.S. might well study—of separating out toxic assets by sticking them into designated “bad banks" set up specifically for the purpose of containing bad assets, thereby keeping them from contaminating the rest of the financial system. It gets more economically dense thence forward (and any mention of Sweden makes me crave IKEA cinnamon rolls, which is distracting), but it’s enough to know, as Aslund says, that “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.”

Furthermore, Aslund says, “bad debts were not taken over by the state or transferred to any aggregator state bank. … Only one bankrupt bank was nationalized.”

So, while Roubini says “Nationalize the Banks! We’re all Swedes Now,” it’s just not true. We’re not Swedes. And even if we were, we’d use a distinctly American method to fix our banks—not nationalization. SP

Stephanie Ramage is news editor of The Sunday Paper. To read more of her work, including articles on Atlanta’s crime problem, visit The Ramage Report blog at www.sundaypaper.com.