You may have seen Ed’s post “Gillian Tett: Washington is talking to Swedes about banking crisis solutions” a week back about how the U.S. government was getting ready to talk to Swedish officials regarding the banking crisis. This is a very important development and I have a lot more to provide below on the issue as it pertains to today’s events and Japan’s crisis early this decade.

Today, I want to make the case for seeing writedowns as central to this global downturn. To do so, we need to rewind and compare what is going on today with what we have experienced in the past. Drawing on this comparison, I can demonstrate that traditional policy tools are likely to be ineffective today. Moreover, the present course of action will also prove inadequate. Other more aggressive means must be applied in order to ensure a more stable banking system and a path to recovery. Likely remedies will include a reorganization of large swathes of the U.S. banking system.

This is a post I wrote last week on naked capitalism.

In any banking crisis, the central question always is: which financial institutions now operating are insolvent, how can we identify them and remove them from the system, and how can we recapitalize the remaining institutions in a way that restores confidence to the system generally? Therefore, any response by policy makers must address three separate issues:

The following is a post from the site Euro Intelligence, published just 5 days ago regarding the Swedish solution to the banking crisis. I am providing this version with the author’s permission, who should be credited with much of the Swedish bank resolution solution’s creation. A longer version is linked at the bottom of this post.

Lars Jonung, who wrote this piece, is now a research adviser at the European Commission in Brussels. He was previously professor of economics at the Stockholm School of Economics. He has published many books and articles in English and Swedish and is the co-author of the leading macroeconomic textbook in Swedish.

You should also note that Jonung served as chief economic adviser to the Prime Minister Carl Bildt in 1992-94 when the Swedish solution was implemented. His characterization of events in this piece is very much at odds with what Alan Blinder recently said in a New York Times piece. Given his role in the process, this discrepancy should be noted.

Marshall Auerback here.

Unlike Ed, I like to call a spade a spade regarding the Obama Administration’s economic gurus. The more they screw up, the greater the number and depth of the crises, the greater the responsibility/ power Obama gives them. I wonder what he’d do if they ever succeeded? You can’t assume independent probabilities when you have the same actors making policy (and not learning from their past mistakes).

More broadly, you can’t assume independent probabilities even with different policy makers if they share the same theoretical priors and methodological blinders. It is very worrying is that neither Geithner, nor Summers display any obvious remorse or sense that they made contributed to the current mess, thereby making it impossible to believe that they actually understand how to get us out of it. It reminds one of George W. Bush’s reluctance ever to acknowledge an error (and look where that got us).

Geithner and Summers are far more likely to doom Obama’s Presidency. There is no hope for Obama if he continues to embrace neo-Rubinism as his governing creed.

Since everyone seems to be talking about nationalization and pointing to Sweden as a model for the future, one should ask whether Sweden actually nationalized anything. No one is talking about outright Hugo Chavez-style expropriation here. The only nationalization I see is what was done in the case of AIG and we know where that led.

I certainly believe the knee-jerk reaction against the ‘N’ word, as Barry Ritholtz calls it, is overwrought and have suggested we dub it pre-privatization. After all, didn’t the word recession come into existence for similar reasons — fear of the ‘D’ word depression.

Back in August, I pointed to Sweden as a model as well. You can read the post, “The Swedish banking crisis response – a model for the future?.” But, the Peterson Institute also has a fine post by Anders Aslund on what really happened in Sweden and it was not nationalization.

Here’s a bit of what he had to say:

UPDATE: This is another re-post given the huge bailout just administered to AIG.

I am coming out in favor of nationalization in the United States. The efforts to fix the banking system to date have failed. As a result, America is still threatened by the menace of systemic risk. In my view, this risk can only be diminished significantly by ‘pre-privatizing’ large, bankrupt institutions. I am talking about temporary nationalization of a few institutions rather than a wholesale longer-term government ownership of the banking sector. I will often use the word ‘pre-privatization’ because the word nationalization conjures up a Hugo Chavez-style asset confiscation which I believe is not accurate and clouds the picture.

Through the pre-privatization of large institutions which are effectively insolvent, trust will be restored, asset prices will find a natural equilibrium level and prudent lending can commence once again. By resisting pre-privatization in any and all forms, the Obama Administration is setting itself up for failure. In that scenario, President Obama might end up looking a lot more like Herbert Hoover than Franklin Roosevelt in American history books.

As recession takes hold, European citizens are starting to ask questions about how they were led into this, the deepest downturn in three-quarters of a century. The leading Spanish daily El Pais published a very thoughtful article today asking how things had unravelled so quickly and so spectacularly in Spain, previously one of the fastest growing economies in Europe.

These are the same questions that one must ask in the United States, Britain and Ireland regarding their own property bubbles. And, in view of recent turmoil in astern Europe, I suspect similar answers will be sought there as well.

This first part in a series of articles lays out the statistics of bubble and bust, demonstrating the scale of the bubble in Spain and it also makes a number of suggestion as to how to prevent a recurrence. You should note that this article points out Spain’s helplessness due to its lack of control over interest rates as a key impediment to solving the problem. Below is my translation of the article:

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Naked Capitalism’s Yves Smith was on Fast Money at CNBC yesterday. She made a number of good points regarding the discussion on nationalization. One that particularly resonated with me was her assertion that the United States is nationalizing one, two or three banks every Friday through the FDIC (see list here).

Here is yet another post from early last year which presages all of the problems we are seeing today. As I have often written, the fake recovery is just an attempt to paper over these problems. It won’t work. Where Ireland, Switzerland, Austria or the Baltics were front and center in February 2009, Greece, Spain and Portugal are now. But don’t think those other problems have gone away. As with Northern Rock, Bear Stearns and Lehman Brothers, contagion spreads to the weakest link – which either passes the test (usually with external aid) or collapses. And then it’s on to the next weakest link. That’s how crises work. This one is no different.