Financial Reform in a Crisis: The Swedish Solution


Whenever the question is raised about the appropriateness of the bailouts for our largest financial institutions during the most recent financial crisis, the usual response among people who defend the idea is to suggest that without those bailouts we would have had a meltdown of Great Depression-like standards. For example, former Treasury Secretary Timothy Geithner is a prominent proponent of this view.

In one sense, the defenders are right: Allowing a wholesale collapse of the “too big to fail” banks likely would have triggered an economic disaster of incalculable consequences. But in another sense, the defenders of the post-Lehman financial reforms have established a false dichotomy. Because there was a third alternative, as Leif Pagrotsky, a Swedish Social Democratic politician who worked at the Central Bank of Sweden (the Riksbank) and in the Ministry of Finance, notes in the interview below.

Sweden did not just bail out its financial institutions by having the government take over the bad debts. It extracted pounds of flesh from bank shareholders before writing checks. Banks had to write down losses and issue warrants to the government.

This strategy held banks responsible and turned the government into an owner. When distressed assets were sold, the profits flowed to taxpayers. Plus, the government was able to recoup more money later by selling its shares in the companies as well.

Pagrotsky was working at the Riksbank at the time of Sweden’s banking crisis and provides an eyewitness account in this interview. What went right? What went wrong? And in retrospect, did the so-called “Scandinavian approach” offer a better alternative than the Geithner plan?

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