http://www.creditwritedowns.com/2009/01/bailouts-catching-a-falling-knife.html

Cheers.

So with that caveat, the only way I see to put a huge band-aid on the current system in situ and leave it intact in its current form is to go directly to the root of the cause of the breakdowns and bailout the mortgage holders, meaning the actual people that took out the mortgages. And it may well be too late to do this since the first Alt-A and sub-prime collapse has dominoed out to commercial credit, consumer credit, and other tangential markets.

If the governments, perhaps on a bank-by-bank or region-by-region basis, made sure that enough mortgage payers could make enough of their payments then the entire system above it will hold. (Or would have – again we may be closing the barn door after the horse is far to gone to put back in). This includes every tier of derivative tissue paper, every insurance bet, etc.

Concomitant with this form of bailout I would recommend that they enact regulation of the derivatives market with a maximum amount on obfuscation allowed. I.e. a derivative instrument cannot be more than X levels from whatever thing of intrinsic value it is based one – whether X is 3x, 4x, or 5x I can’t really say.

So with a regulatory framework unwinding derivatives from the top down to a reasonable and manageable level, and with mortgage relief from the bottom up to keep the derivative chain from collapsing, the whole system can be healed without resorting to knee-jerk fixes on a company-by-company basis where only the tail end derivative chain at 5x levels or higher from the underlying thing of value is fixed. The current attempt to fix things from the top down is not going to work and will result in a collapse of the entire system all the way to sovereign governments. The only way to heal it is at the source up the chain from the bottom while unwinding the leverage within a sound regulatory framework from the top.

Thank you for the clarification. A few points and questions for you. First, I do not misunderstand the rationale behind why Sweden took the approach that they took. From my perspective, all of that is irrelevant. It is a historical issue from another country.

I look at this from a utilitarian perspective. I find the politics of Sweden less interesting.

What DOES interest me is whether the framework set up has utility in the present day for countries with banking crises like the U.S., the U.K., or Ireland. I certainly believe it does for several reasons. (The solution achieved its goals relatively quickly. It induced less moral hazard than the present solutions in the U.K. or the U.S.. And it helped restore confidence in the banking system).

What I want from you is an alternative solution for today for the U.K., the U.S. or Ireland rather than a recitation of where this solution failed in the early 1990s given your opposition to this option.

That said, I am aware of the class structure in Sweden and the relatively confiscatory tax system there as well. I appreciate your taking the time to share your views on the subject with readers. Read Stefan Karlsson’s blog for an Austrian view to this:

http://stefanmikarlsson.blogspot.com/

I sense that you – as a social liberal and fiscal conservative — are also in the Austrian camp. And that should give you misgivings about the ‘nationalization’ solution. Despite my own misgivings, I see it as necessary in much the same way I have misgivings about fiscal stimulus but feel is necessary:

http://www.creditwritedowns.com/2008/12/confessions-of-an-austrian-economist.html

One thing you said earlier which I find interesting is the degree to which the tech bubble bailed out Sweden – and I would assume Finland. We can’t assume that in the absence of that boost to the economy, Sweden would have recovered so quickly. Nevertheless, I am still looking to see if you have any suggestions of the way forward.

I do feel I have made my point of view clear and logical.

Cheers.

Sweden is a two class society. It consists of a ruling class of about 10,000 persons and a middle class of everyone else. The ruling class owns and controls around 45% of the entire Swedish GDP directly and controls another 35% or so via interlocking directorships in state owned industries and companies. This group of 10,000 is mainly confined to branches of nine extended families. There is zero mobility from the middle class to the ruling class, with the possible the exception of politicians who attain the level of Prime Minister. Outside of this one exception, the ruling class is entirely hereditary. As an example, many folks think that IKEA is a Swedish company. It is not. The owner, Ingvar Kamprad, fled Sweden long ago when the Swedish ruling class moved to take IKEA over and freeze him out. (IKEA is Dutch company).

So when you view the Swedish ideas of “nationalization”, or any other Swedish economic or political policy for that matter, and view Sweden through the lens of a multi-class, free market society you will see things that are not there. You will assume goals that the Swedish politicians and ruling class do not have and do not share. Nationalizing a bank, or anything else, is not designed to restore a free market society. It is designed to keep capital and control in the hands of the Swedish ruling class. If you examine the current ownership of voting shares in the formerly nationalized Nordbanken bank (now renamed the Nordea bank), you will find the Swedish government and the Swedish ruling class families are back in control.

So if your solution to the US and British banking crises is to keep capital concentrated in the fewest hands then Sweden may be a model. If, on the other hand, your goal is to refloat the banking system in order to relight the pilot light of the free market furnace, then the Swedish model is based on a system whose goals are entirely incompatible.

If you are interested in how the Swedish ruling class maintains its wealth and control I can offer a few tidbits. One method is to declare a small class of shares in a company “voting shares” and all other shares “non-voting”. The well-known Wallenberg family ( http://en.wikipedia.org/wiki/Wallenberg_family ) uses this method with their SEB bank and their investment firm Investor AB, for example. The family owns a minority of shares in these but controls the voting rights hence the companies themselves. Another method is to keep these voting shares in a Swedish foundation. The foundation is run tax-free and is able to accumulate and distribute profits with zero accountability. Though occasionally an upstart politician finds his way into parliament and calls for audits of these foundations. The audits never occur and the upstart either falls into line or falls out of politics.

There are many more ways that the ruling class maintains its control of the Swedish economy, but to describe them all would be a very long essay indeed. I do find it a fascinating system. I am still amazed to see how the old European oligarchies have modernized and still maintain their control to this day – even in a pluralistic multicultural world dominated by liberal democracies and free markets.

So your premise that the Swedish model is applicable to the current crisis is based on a fundamental misunderstanding of the goals of the Swedish policy makers and the function of the Swedish financial system itself. A free and open system is not one of these goals; quite the opposite in fact.

I get the sense you are not a fan of the Bildt government. Tell me a little about your view on that government and how any of what they did can contribute to a plan in Washington. Also, it would be great to hear your view on what needs to be done generally to shore up banking systems.

Cheers.

I’ve said my piece several times over on the BS the Swedish politicians are spreading about the “Swedish Bank Nationalization Plan” (i.e. it was *one bank* and “not a plan”) so I won’t beat that dead horse further.

But if Washington wanted to pick the single most clueless of the clueless louts that engineered the Swedish banking crash in the first place, then they truly have the right guy. I am sure Ljundgren will wax poetic and spin a wafting yarn of his and his fellows competence as the stewards of the Swedish economy. If only Pinnochio were true we could watch his nose grow ’til the swallows roosted and raised families.

If Washington adopts any part of this clown of a man’s advice then we are really in very very deep doo doo. Sweden’s economy did not recover due to nationalization or any other dubious policy actions by Ljundgren and his fellows. Sweden’s economy recovered becuase it is top heavy in the tech sector, and the Internet and mobile phone booms took off simulatneously starting around 1993. The tide lifted all boats including the foundering and oarless Swedish bathtub captained by Ljundgren and like minded landlubbers of his ilk.

I shudder for the repercussions if Obama and team adopt anything this guy recommends.