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The U.S. opts for the bailout hustle over the Swedish banking crisis response

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By Edward Harrison of Credit Writedowns

I referenced Matt Taibbi’s latest work at Rolling Stone “Wall Street’s Bailout Hustle” recently when talking about a movie on Ponzi schemes and fraud that aired on 60 Minutes. I liked the piece and recommend you read it – fully aware of the awaiting hyperbole Taibbi uses to hype his case.

The interesting bit is Taibbi followed up his article with a blog entry “On the Bailout Hustle” in which he contrasts the American bailout hustle with the more effective but less banker-friendly approach used in Sweden after their own housing bubble and financial crisis in the early 1990s.

My feeling on that is similar to what Barry Ritholtz (check out his site if you haven’t), the author of Bailout Nation and one of the guys I spoke with at length for this story, proposed. He said that “we should have gone Swedish on their asses.” The Swedes after a similar bubble burst in 1992 temporarily seized control of insolvent institutions, forced banks to write down losses before they got aid, and gave taxpayers a huge share in the upside of recovery. It was a tough-love approach that really worked and forcefully addressed the moral hazard issue in a way we never touched.

Of course, it was Barry who pointed this passage on Sweden out. He would, do that, wouldn’t he?

I definitely agree with Barry. In fact, I am probably the first major blogger to broach the subject. See my post: The Swedish banking crisis response – a model for the future? from August 2008 which describes a piece by former Riksbanks head Urban Bäckström from way back in 1997! This is the number one entry on the Internet when you search for ‘Swedish banking crisis.’

Now, this was before the Lehman debacle. And I anticipated massive credit writedowns for the global financial system which would precipitate a major financial crisis. Of course, this is what happened.  But, pre-Lehman, I was looking for a banking crisis response model which would prove effective. I looked at the Japanese model and found it wanting. The Nordic model is more promising.

Here’s what I said in August 2008:

Yesterday I pointed out that today’s global banking crisis has some historical precedents worthy of comparison. In particular, I looked at the Japanese bailout schemes from their housing bubble to see if there was anything there to learn. Unfortunately, the Japanese experience leaves doubts as to whether government intervention is helpful or harmful.

There are other examples, however. The Nordic model is a particularly useful one to look at as we move forward. Sweden’s Central Bank Chairman Bäckström shared some of his insights from that experience some eleven years ago in a speech to a Federal Reserve symposium that is available on the Swedish Riksbank website. This is a brilliant piece of work.

I use the term ‘Nordic’ because Finland and Norway also had deep, deep contractions due to a banking crisis at the same time (see Marshall Auerback’s piece on Finland here).

Now, the information about these financial crisis strategies was readily available in the public domain for years. I mean, my blog post was based on a 1997 article for goodness sake. Clearly, the Obama people didn’t want this solution because they are captured by the financial services industry. That’s why the U.S. is going the Japanese route of bailouts and accounting dodges.

The Swedes of the mid-1990s did drag their feet too; they didn’t implement a draconian solution until it was obvious the system was insolvent. And I would add that the technology bubble bailed the Finns and the Swedes out. (Oil helped the Norwegians). So, without the boon for the likes of Nokia or Ericsson, where would those economies have been? Nevertheless, this is not the course the U.S. is on. The closest we have seen to this is Ireland – but even there I have had my doubts.

The key difference is the Swedes recognized:

Their entire banking system was effectively insolvent. Yet, they were able to fashion a workout scheme that had bi-partisan political support, did not unfairly reward shareholders, dealt with moral hazard, separated regulatory and workout roles so as to reduce conflicts of interest, and that quickly wrote down valuations and liquidated the bad debts as opposed to dragging the process out.

Fifteen years later, even the Swedes are not using the ‘Swedish model’ despite their massive loan exposure in the Baltics, which are now in Depression. Clearly denial as to the severity of the banking problem is not just an American phenomenon, it is also a European thing too.

But you can only hide your head in the sand for so long. Reality has a way of making itself felt.

———

Update:  You’ll probably have noticed that I never used the words ‘nationalisation’ in this piece – and for good reason; The nationalisation talk is just a red herring. The crux of the article is not about nationalisation – or even FDIC-style asset seizure at all. What this article is really about is what I highlighted and said it was about: The Swedes “quickly wrote down valuations and liquidated the bad debts as opposed to dragging the process out.” Put simply: we are looking at a choice between the Japanese approach and the Swedish approach.

Now, when it comes to seizure, we are really mainly discussing Citi. JPMorgan was never in doubt. Wells Fargo probably could have made it through with TARP funds alone. After the Merrill deal, Bank of America was the only other too-big-to-fail company that probably would have been seized. (Some super-regionals may have been a question as well). But, in the main, what we’re discussing here is whether Citi would have been taken into majority government ownership the way that AIG was.

As for writedowns, this could have been done using an RTC-type vehicle as we saw after the S&L crisis or using a bad bank as the Swedes did during their crisis. The key is writing down the assets quickly rather than keeping the deadweight on the balance sheet as was done in Japan.

So the article is a reminder that the bailouts were done because they were the preferred option, not because other choices didn’t exist. And this is important yet again because we are about to see this year that having avoided asset writedown and used asset appreciation to bail out the banks is going to have a very negative impact on credit – and the economy.

Above I did point out that the Swedish dilemma was tackled in a bipartisan way, so talk of ‘nationalisation’ is germane because this fictitious argument would probably have been used by Republicans purely for political purposes rather than ideological ones. After all AIG was nationalised and Citi and BofA were effectively nationalised, albeit without the requisite strings attached. The point would be to block Obama’s agenda in order to weaken him. But this is just politics.

One last point, the Swedes are playing the same game this time too! That’s because it’s politically easier to try to let banks recapitalize themselves via high margin spreads (borrowing short and lending long in a steep yield-curve environment).

The problem for banks is always that they lend long – and that means you can never know the true extent of future losses. That gives an accountant a lot of room for playing with the numbers. Writedowns are just an estimate of loan impairment of unrecoverable asset value. So all a bank has to do is pretend that assets are only temporarily impaired.

You’ve heard the term ‘extend and pretend.’ That’s what it’s all about – extending the term of the loan so that even if the asset is eventually written down, the profits earned in the interim will restore the bank’s lost capital.

The key is asset prices and accounting standards. If asset prices fail to rise, writedowns are going to come sooner than later – and that means insolvency for some banks.

If regulators change accounting standards and allow banks to pretend their assets don’t need to be written down as they did in the early 1980s, the problem could be much larger down the line, as it indeed was when the S&L crisis finally blew up – especially if asset prices (the loan collateral) don’t rise. This is indeed what has happened in the U.S. yet again.

Update II: a lot of people have bought the ‘nationalisation’ propaganda. It is Fannie/Freddie-style ‘nationalisation’ that is criminal. These companies should be wound down and eliminated. Instead, they are being used as a slush fund for bailing out the mortgage market.

Which is more free-market – a bailout and mega bonuses all around or asset seizure and recapitalization?

There is a price for bank failure in a capitalist society, you know. It’s called bankruptcy and seizure. The FDIC seizes and resells bank assets every week. That’s the right approach. But apparently, Lehman’s demise and the inadequate preparation for it scared everyone into bailouts – and that’s how it’s going to stay it seems.

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward

29 comments

  1. attempter

    Other than Taibbi having dug it back up, is there any reason this “Swedish” notion is being talked about again?

    I remember Krugman’s advocacy from way back a year ago, and how for a little while it even seemed like they might have to try something like it. This was when more people were deluded that Obama actually wanted to change anything from Bush/Cheney.

    But it went nowhere.

    In retrospect it became clear to me (and I’ve mentioned this several times here and elsewhere) that Swedish-style nationalization was a “public option”-type gambit.

    The concept was floated as a seemingly tough and acceptable alternative to breaking up the rackets completely, and if they had felt enough political pressure they would have pretended to be seeking it.

    Then they would have gone through fraudulent motions, claiming to want it but not fighting for it while allowing it to be gutted every step of the way. (Remember the “good bank” notion as a watered-down version of the “bad bank” concept? That’s one example very similar to how the “public option” was gradually attenuated. So in principle they were already preparing the watering down process, even before scam was put into motion for real.)

    And then the thing would have been dumped completely after an exhausting struggle whose only real goal was to provide aid and comfort to Republicans, since the only real end result is to prove how corrupt and pointless government as such has become.

    It sounds odd to say the Democrats have wanted that exact result, but it’s impossible to explain their actions otherwise. That’s exactly what they’ve done with the health racketering bill. (Astoundingly, these criminals are again trying to trot out the public option scam and see which rump idiots are still around who might fall for it a second time).

    This has also been the path of the CFPA. Float name with fanfare, make initial proposal that falls short of the hype, don’t fight while in Congress the thing is gutted in everything but name, and now Dodd says he wants to get rid of it completely, and Obama has no apparent objections.

    So we have two high-profile proven examples. There are several more obscure examples as well.

    Swedish-style nationalization would have been another such example.

    (As far as I can see that’s still a “would have been”, since this new flurry of blogosphere interest looks like hype so far. Will there be “real” new interest when the next crash comes? I guess at that point they’d have to go to further extremes to try to keep the zombies propped up and the Bailout plunder going in the face of what I have to hope would be some real political opposition from the people.

    So maybe as a delay/appeasement tactic they would float the name and play the game, but it would be the same scam and the same lie.

    This system is incorrigible, it is irredeemably corrupt, and this cadre is congenitally criminal. For as long as it exists it will do nothing but wage war on the people, and every word it says will be a Big Lie.)

    1. Doug Terpstra

      Excellent post—appropriately cynical. Obama circumscribed key problems too well in the campaign and raised expectations so high that his wholesale breach of contract is now irreconcilable for too many voters. I can’t imagine him recovering credibility sufficient for a 2nd term, but perhaps electioneering makes that moot anyway.

  2. kalle

    Hi Yves,

    Really like you to point out the situation Nordic banks. I agree with your view that the Swedes are not following their own model this time. My non fact based view is that the Swedes bank got more or less bailed out behind the scene for “free” in 2008/2009 and there is plenty of bad debts in balance sheet which are waiting to explode (currently from Baltics/Poland). Secondly their home market debt positions are not as strong as they look, as the property prices are high compared to average income (at least after tax) and increasing unemployment/worsening of work conditions.

    Although this is only a gut feeling, so the question is has anyone done comprehensive analysis on the topic? Secondly it would be interesting to see comparisons between Nordic banks.

  3. William

    Swedbank (SWEDA) has so far been able to recapitalize without help from the crown, though the original owners (Sparbanks Stiftelsen) were wiped out in the first try by leveraging their stock position.

    SEBanken (SEBA) is still really the Wallenberg industrialist family’s pribvate bank, they bailed it out last time without crown aid and will likely have to again.

    Handelsbanken (SHBA) is the most conservative large Swedish bank, never really got involved in the Baltics, and is in much better shape (compare the charts).

    Things seem to be cooking under the Swedish calm facade:

    http://www.riksbank.com/templates/Page.aspx?id=43398

    Economic Commentaries : Urgent need for new financial regulations and tools

    DATE 15/02/2010

    A thorough review of the regulatory framework for the Swedish financial sector is needed. It is high time to take a coherent approach to everything from the winding up and reconstruction of financial undertakings in distress to the responsibilities, division of roles and tools relating to the maintenance of financial stability in Sweden. One or several commissions of inquiry should be appointed urgently to review the financial regulatory framework.

  4. Mickey in Akron, Ohio

    While “nationalization” has been discussed by Ed before it was never a serious option.

    The moment TARP was passed the incoming administration’s hands were tied… To pretend otherwise given the political-ideological forces at work is sheer fantasy. This is not to exonerate the Obama administration but no Democrat could have nationalized anything in this political climate. If accusations of “socialism” are part of the political discourse over a health care plan to nowhere, imagine what a proposal for nationalization of troubled financial institutions would have involved? Hell, as I’ve said before, Bush and Paulson could have nationalized the banks easier than any Democrat! Perhaps the more interesting question is why they didn’t propose ‘nationalization’ before leaving office? An answer to this question provides much of the answer to why the Obama administration didn’t do it either.

    Continuity is more the rule than the exception among American elites once you get past their particular party affiliation in both domestic and foreign policy. Is this really any different? Change we can believe in is NOT, and was never meant to be interpreted, as a radical departure from the past 40 years of neoliberal supply-side economic policies. For those of you who HOPED it was I understand your pain… But get over it! CONTINUITY is the rule more than it is the exception. Muddling through is the modus operandi in American politics. Give the “New Deal” a rest until after 2012, assuming Obama and crew survive. But even then…

    Is the Swedish model applicable to the American situation given the difference in size and weight of the financial institutions involved? Moreover, the Social Democratic presence in Swedish politics has no real counterpart in American politics. Don’t even suggest that the Democratic Party is the equivalent of the Social Democrats in Sweden. The political spectrum in Sweden is much further to the LEFT than many left-leaning Democrats in this country. Talk about apples and oranges.

    Finally, when was the last time anything was nationalized in the United States? There simply isn’t the institutional framework with which to pull it off. Muffing it would only play into the hands of the FMUA – free market utopian anarchists – who blame government for the financial crisis anyways. But that’s another can of worms. Perhaps the S&L Crisis and the RTC might have been a “model” for unwinding this debacle but my memory doesn’t recall the specifics… It was over 25 years ago. My point being that few policy makers in the present, with the exception of Paul Volcker and John McCain perhaps, have any recollection of it either. Greenspan, Rubin, Summers, and Geithner coordinating the nationalization of the banks? Does anyone really believe this gang of four has either the inclination or will power to do it? Krugman and Reich talk a good game but when push comes to shove is there really anyone with the testicular fortitude or politcal weight to impose nationalization on the banks/financial industry? Is the window of opportunity even there or has it closed? If financial reform is withering on the congressional vine, it’s safe to say that nationalization has been extirpated root and branch.

    1. Edward Harrison Post author

      Mickey, you’ll probably have noticed that I never used the words ‘nationalisation’ in this piece – and for good reason, the ones you talk about. The nationalisation talk is just a red herring.

      Let’s be honest. When it comes to seizure, we are really mainly discussing Citi. JPMorgan was never in doubt. Wells Fargo probably could have made it through with TARP funds alone. After the Merrill deal, Bank of America was the only other large company that probably would have been seized. So what we’re discussing here is whether Citi would have been taken into majority government ownership the way that AIG was.

      But the crux of the article is not about seizure at all. Again, it’s only Citi and maybe BofA (and perhaps a few super regionals that may have been seized). The FDIC seizes smaller banks every Friday.

      What this article is really about is what I highlighted and said it was about: The Swedes “quickly wrote down valuations and liquidated the bad debts as opposed to dragging the process out.”

      This could have been done using an RTC-type vehicle as we saw after the S&L crisis or using a bad bank as the Swedes did during their crisis. But the key is writing down the assets quickly rather than keeping the deadweight on the balance sheet as was done in Japan.

      So the article is a reminder that the bailouts were done because they were the preferred option, not because other choices didn’t exist. And this is important yet again because we are about to see THIS YEAR that having avoided asset writedown and used asset appreciation to bail out the banks is going to have a very negative impact on credit – and the economy.

      In the part that I highlighted, I did point out that the Swedish dilemma was tackled in a bipartisan way, so your comments about ‘nationalisation’ red herrings are germane to the degree these fictitious arguments would be used as a pretext to prevent a better outcome.

      1. Mickey, Akron, Ohio

        Ed,

        Then it’s really a question about how politics in Sweden differs from that here. The fact that Sweden is a parliamentary democracy in which party discipline exists is only part of the answer. But when contrasted with the separation of powers, checks and balances inherent in the American system it allows for the kind of quick, decisive intervention that we can only dream of. Likewise, it presumes an executive branch with powers that you yourself have expressed reservations elsewhere – a grab for power – that most Americans would likely find troubling. Moreover, the Swedes do have a pragmatism predicated on objective anaylsis and rationalism that makes short work of ideology when its crunch time. Add to this that the Social Democrats and by extension, the LO [Landesorganisationen - Swedish Confederation of Labor] governed Sweden from 1932-76 they were not about to sit by and watch the banks fleece the Swedish taxpayer. This kind of leverage had a role in the decision taken to nationalize the Swedish banks. If I recall it was the Conservatives who actually pushed through the natinalization/bailout? But it was certainly because it was their only option due to the Social Democrats’ influence. They could not have done it witout the support, even if lukewarm, without the support of the Social Democrats.

        Can anyone imagine the Democrats doing so at the behest of the AFL-CIO? Americans cannot fathom just how powerful the SDP and LO were/are in Swedish politics. With approx 78% [2003] of the labor force – blue and white collar, public and private – organized in unions allied to the Social Democratic Party do the math. At one time it was over 90%!!! Perhaps in some heavily industrialized, unionized Northern states there was a loose parallel 40 years ago but it never had any national presence like that in Sweden. We need not even pretend that organized labor has that kind of support in the general population or political clout at the national level – the UAW – notwith-standing – today in this country. In fact, if you wanted a sure way to kill any discussion of such a proposal short of nationalization have a labor leader bring it up…

        That’s why the Swedish parallel is not something that can be imported. The instituional forces/factors that made it possible there do not exist in this country. I will admit that my knowledge of Swedish politics isn’t as informed as it once was but 40 years of neoliberalism in Sweden hasn’t wrought the “creative destruction” it has here. The “Social Democratic” culture is firmly rooted there.

        Social Democracy in the Scandinavian countries is what the ruling elites of this country really fear and equate with “socialism”.

        1. Edward Harrison Post author

          Mickey, to be honest, you have a false impression of politics in Sweden. The truth is the center-right government in Sweden didn’t want to go the route they did but were forced to by circumstance. That is why they have not done so again. Not everybody in Sweden is a socialist, by the way. Ask the Wallenbergs.

          http://en.wikipedia.org/wiki/Wallenberg_family

          The politics is not about ‘socialism.’ That’s just propaganda, Mickey. And you seemed to have bought into it. It’s more about crony capitalism and whether (well-connected and powerful) shareholders get wiped out. I hope you now understand this. It’s about shareholders and their political connections.

          In Sweden, bondholders were made whole but shareholders were wiped out and that’s what is unacceptable today.

          Only if asset prices start to fall again and it becomes obvious that a large bank is truly insolvent, will shareholders be wiped out. By then, it would be too late of course because a major depression will have set in.

          Oh, and, social democracy is NOT what the ruling elites fear. What they fear is an end to crony capitalism. Which is more free-market, Mickey – a bailout and mega bonuses or asset seizure and recapitalization? The FDIC seizes assets every week and resells them. That’s the right approach. The price for failure is bankruptcy and seizure. C’mon, think!

          P.S. – I should also add that Fannie/Freddie-style ‘nationalisation’ is criminal. These companies should be wound down and eliminated. Instead, they are being used as a slush fund for bailing out the mortgage market.

          1. Mickey, Akron, Ohio

            As you state:

            The politics is not about ’socialism.’ That’s just propaganda, Mickey. And you seemed to have bought into it. It’s more about crony capitalism and whether (well-connected and powerful) shareholders get wiped out. I hope you now understand this. It’s about shareholders and their political connections.

            In Sweden, bondholders were made whole but shareholders were wiped out and that’s what is unacceptable today.

            It would seem to me Ed that why the shareholders took the bath in Sweden back then has something to do with the role of the SDP in Swedish politics. A bailout a la American style there wasn’t in the offing. Are you saying it was a matter of ideology alone – free market adherents – with no allowance for political actors?

            And there’s a big difference between Social Democracy and socialism. They are not the same. By way of extension, the emergence of Social Democracy in this country would signal an end to “crony capitalism” wouldn’t it? What you seem to be saying is that there’s only two alternatives: the free-market approach or crony capitalism. That there’s no room for a third alternative “middle way” – Social Democracy. I disagree with you.

            As for the Wallenbergs, the difference is that they had to learn to live with Social Democracy whether they wanted to or not and have done so. That was political reality! I’m not so sure this country’s ruling families could or have any intention of doing so if push comes to shove. American elites have shown little patience with constitutional provisions when it didn’t suit their purposes.

            Ed, your free-market proclivities are more than apparent. While I do not find the prospects of crony capitalism encouraging, I sure as hell have no illusions about the free-market alternative. I’ll take Social Democracy as an alternative to both anyday.

          2. Edward Harrison Post author

            Thank you for clarifying. I got the impression you were making a pro-bailout defense.

            So I think we have reached agreement then Mickey i.e. the real goal here is to end the bailout/crony capitalist culture rather than adherence to some mythical free market. With regard to banks, that certainly means asset seizure over Fannie/Freddie style nationalization or Lehman style panic.

            And we agree yet again when you say “there’s a big difference between Social Democracy and socialism. They are not the same.”

            The parts about the SPD in Sweden are you and me just arm-chair quarterbacking.

            However, the reason this is relevant has to do with the weakness of the global economy that has resurfaced. The question is what would happen if asset prices come under pressure, unemployment rises, homes are foreclosed and we are again faced with massive writedowns. What then?

            I imagine, then, you will see this issue re-surface.

          3. Mickey, Akron, Ohio

            Ed,

            The bailout was little more than a transfer of our taxpayer monies to the crony capitalists of which you complain. If it was the lesser of two evils remains debatable. But in some ways, I think it’s always been “crony capitalism”… This variant is just more TRANSPARENT!

            I was and remain opposed to any bailout on principle. SHAREHOLDERS took the risk and bear the consequences of due diligence and/or their lack of it. But I suspect that pension funds and the like would have cratered in the subsequent bloodbath along with shareholders.

            We DO agree that neither the mythical free-market or crony capitalist solution is desirable. But then is the middle way the only way forward?

            I also agree that we will likely revisit this somewhere down the road. But will the outcome be any different? Unemployment is likely to persist and job growth will languish so long as the “uncertainty” and “muddling through” groupthink persist. And the idea of throwing another trillion at it will not play well… How will the gridlock be broken?

          4. Edward Harrison Post author

            You ask some good questions, Mickey? I suspect we’ll see warmongers gaining sway in the U.S. or elsewhere and what I have previously referred to as ‘more muscular forms of government’ i.e. a violent response to government protesters.

            I wish I had more answers.

          5. Mickey, Akron, Ohio

            Ed,

            As you say “what I have previously referred to as ‘more muscular forms of government’ i.e. a violent response to government protesters.” concerns me greatly. Creeping authoritarianism is what I call it. We agree again!

            But between the national security state, the Patriot Act, and random acts of violence like Joe Stack’s the noose is tightening… Every individual, regardless of political persuasion, should be concerned about this.

    2. DownSouth

      Mickey in Akron, Ohio,

      You assert: “…no Democrat could have nationalized anything in this political climate. If accusations of “socialism” are part of the political discourse over a health care plan to nowhere, imagine what a proposal for nationalization of troubled financial institutions would have involved?”

      FDR was accused of being a socialist and much worse. Did this cause him to demur?

      One shouldn’t be fooled. This is all highly choreographed play-acting. It’s like professional wrestling: great entertainment, but one shouldn’t mistake it for a real contest.

      And if a serious assault upon the ramparts of the “FMUA – free market utopian anarchists”—is never attempted, how do we know they are impenetrable?

      Quite the contrary, when one thinks of Obama, one needs to think of Belgium’s King Leopold III:

      Blitzkrieg tactics confused the defenders. Glider troops seized bridges before they could be destroyed, and by the second day, Fort Eben Emael, considered impregnable, had fallen, taken by only eight y men led by a sergeant; their principal secret weapon was that they had rehearsed the operation endlessly on a replica of the fort. Britain and France responded to pleas for help by sending powerful forces that joined the Belgian Army on a strong defense line between Antwerp and Namur. Over most of the front they outnumbered the Germans, but that is exactly what the German high command had planned on. Nazi columns forced crossings of the difficult Meuse River, and a mighty army of tanks broke through the Andrennes Forest, which was lightly guarded because it was believed impassable by armor. Then, as the Allies struggled desperately to plug the gap, King Leopold III surrendered the Belgian Army on May 28 with virtually no warning to his allies, leaving their flank almost fatally exposed. The German panzers pushed onward to the Channel, and the Allied forces in the north, now cut off, retreated toward the one remaining port of Dunkirk.
      –C.L. Sulzberger, World War II

      1. Mickey, Akron, Ohio

        DownSouth,

        In 1932 there were socialists and communists – not LIBERALS – to the LEFT of FDR. Roosevelt’s proposals were loathed by the ruling class but better to give half a loaf than lose the entire loaf – not that revolution was ever in the offing. But the sit down strikes, rent strikes, and labor violence got everyone’s attention. Moreover, the population was still comprised of immigrants from Europe familiar with Marxism, anarcho-syndicalism and other ideas from Europe unlike the current generations that have no clue of either. There was organized widespread resistance.

        Socialist/Communists were purged by the AFL-CIO itself between 1948 and 1952 – McCarthyism? Organized labor is despised by many in this country and for good reason…
        There isn’t any LEFT with which to hold Obama or anyone’s else’s feet to the fire. Voting for the Republican candidate because Democrats cannot deliver will likely prove counterproductive in the short run. Electoral immiseration is hardly a recipe for success or responsbile when the the consequences of voting for the “opposition” are most likely to be borne by someone else already in worse circumstances.

        I will admit that the choreography is well done but until the populace is mobilized into action against FMUA it remains impenetrable. So long as it remains whetted to such ideas out of ignorance or believes that it was the government’s failure, not the success of neoliberal economic policies, we will remain stuck. An alternative from below must be forthcoming before any lasting meaningful change can occur. Obama is not MLK and you know that!

        40 years of darkness will not be undone in 4… Besides I’m not worried about what Obama does or doesn’t do. It’s what you or I and others like US do that matters. MLK didn’t get to the promised land and neither will we, but that doesn’t mean we wait for the second coming out of Washington D.C.

        1. DownSouth

          I pretty much agree with everything you have to say, so instead of providing more evidence to substantiate those things we agree on, I’ll instead zero in on the one point where we might disagree.

          You say that in 1932 “the (US) population was still comprised of immigrants from Europe familiar with Marxism, anarcho-syndicalism and other ideas from Europe unlike the current generations that have no clue of either. There was organized widespread resistance.”

          But I wonder just how much that “organized widespread resistance” was due to Marxist influence.

          On the one hand we have Hannah Arendt, who I believe would argue it was quite important:

          Marx’s transformation of the social question into a political force is contained in the term ‘exploitation’, that is, in the notion that poverty is the result of exploitation through a ‘ruling class’ which is in the possession of the means of violence…. If Marx helped in liberating the poor, then it was not by telling them that they were living embodiments of some historical or other necessity, but by persuading them that poverty itself is a political, not a natural phenomenon, the result of violence and violation, rather than of scarcity.
          –Hannah Arendt, On Revolution

          But on the other hand we have Reinhold Niebuhr, who argues it played a minor role:

          The American labor movement was almost completely bereft of the ideological weapons, which the rebellious industrial masses of Europe carried. In its inception it disavowed not only Marxist revolutionary formulas but every kind of political program. It was a pragmatic movement, born of the necessity of setting organized power against organized power in a technical society. Gradually it became conscious of the fact that economic power does try to bend government to its own ends. It has, therefore, decided to challenge a combination of political and economic power with a like combination of its own. These developments have been very recent; but they have also been very rapid.

          Naturally, the “semi-official” creed of a bourgeois community, as distinguished from the philosophy which informs our Constitution, was arrayed against this development. The right of collective bargaining was declared to be a violation of the rights of employers to hire or fire whom they would. Supreme Court decisions, directed against the labor movement, were informed by the generally individualistic creed. But ultimately, in the words of “Mr. Dooley,” the court decisions “followed the election returns.” Long before the “New Deal” radically changed the climate of American political life the sovereign power of government had been used to enforce taxation laws which embodied social policy as well as revenue necessities; great concentrations of power in industry were broken up by law; necessary monopolies in utilities were brought under political regulation; social welfare, security and health and other values which proved to be outside the operations of the free market were secured by political policy. More recently, housing, medicine and social security have become matters of public and political policy. All this has been accomplished on a purely pragmatic basis, without the ideological baggage which European labor carried.
          –Reinhold Niebuhr, The Irony of American History

          A couple of things seem to argue in favor of Niebuhr’s point of view. To begin with, Marxism was certainly well-known in Germany, and yet it did not prevail. Niebuhr explains the dynamics by which fascism became dominant:

          Furthermore, the middle class, even when the independent retailer becomes a chain store clerk through the force of capital concentration, does not react to the situation in proletarian terms. The white collar worker may not own any property and may therefore logically belong to the proletariat, but the dictum of Boudin and others that salaried workers “are in reality just as much a part of the proletariat as the merest day laborer” fails to take important psychological factors into consideration. If we may regard Germany, where all the social and political forces of modern civilization have reached their most advanced form, as a criterion, none of the disinherited middle classes express themselves politically in proletarian terms. On the contrary they turn to fascism, which combines enough radicalism, to give the poorer middle classes some hope of better things to come, with the political strategy of anti-Marxian and nationalism, by which it gains the support of the economic overlords, who are afraid of the rising tide of labor. That the middle classes can be drawn into a party in which the wealthiest and the poorest ostensibly make common cause, is the measure of their political intelligence. Whatever may be the logic of their position in economic terms, they would rather express their resentments in a nationalistic spirit, and in minimum demands for the elimination of financial abuses, than in thoroughgoing economic changes. They will never be reduced to proletarian terms politically (even though they are reduced to those terms economically) until they have lost their cultural as well as their economic inheritance. Unlike the proletarian, they do not stand outside, but thoroughly inside, the national culture.
          –Reinhold Niebuhr, Moral Man and Immoral Society

          But in the end the US did not go the same direction as Germany. Quite the opposite, in the US the petty bourgeoisie did not ally itself with the oligarchy under the umbrellas of fascism, but instead formed a coalition with the proletariat which resulted in the New Deal. Now I understand there could be many reasons to explain this, but could one of them be that the absence of “Marxist baggage” on the part of the proletariat have made it a more palatable coalition partner for the petty bourgeoisie?

          1. Mickey, Akron, Ohio

            DownSouth,

            When I said immigrants and the ideas from Europe I meant to imply that whether one believes in an ideology or not may not be as important as actual exposure to it by way of experience. Immigrants knew what exploitation was, had some inkling of why, and allied themselves with whoever mitigated its worst affects.

            Marxist baggage as you say was certainly how ideas from Europe were portrayed – FOREIGN – and hence not applicable to the US. Both the IWW, AFL, and CIO all went through this debate in one form or another. Niebuhr downplays its importance. US labor history is very violent. Repression and the heavy hand of the state in conjunction with private armies – Pinkertons and vigilantes – played a significant role. Pragmatic “bread and butter” trade unionism was all that would be tolerated. Could it be that Gompers took the path of least resistance? Also too is the “craft” versus “industrial” division that characterized the early labor movement in this country. Craft workers [petty bourgeois?] in the building trades loathed their less skilled industrial brethern.

            The IWW – Industrial Workers of the World – was the only radical revolutionary labor movement in this country and shortlived as a result. Its adherence to syndicalism certainly played a role in its portrayal as unAmerican and subsequent extermination. Who even remembers the “Wobblies”? Once the CIO merged with the AFL in 1955 the socialists and communists had been effectively purged from the ranks of organized labor. Add to this the brutality of Stalinism and the “hysteria” of the Cold War and a labor movement along European lines wasn’t in the cards. Co-opted by the CIA, the AIFLD – American Institute for Free Labor Development [AFL-CIO front organization] – worked hand in glove with the CIA to thwart “socialist” labor movements worldwide. It’s not a picture of international solidarity by any means!

            But if the real thrust of your argument is to suggest that Marxism in the US never played out according to Marx’s predictions, you win hands down. There’s no disputing that FACT.

            Just the other day on the ‘Backlash’ piece by Yves last Friday I voiced my reservations about how awkward and irrelevant Marxism is without major revision. CLASS may now be the dominant fault line in American politics but its usage must be used in the context of a society in which manufacturing is no longer dominant. Industrial workers are too small a segment of the labor force. And they are hardly in the vanguard of the proletariat!

            How Marxism both here and Western Europe comes to grips with this new reality remains to be seen. But without revision or a major upgrade Marxism as we once knew it is largely irrelevant.

  5. mondo

    “Fifteen years later, even the Swedes are not using the ‘Swedish model’ despite their massive loan exposure in the Baltics, which are now in Depression. Clearly denial as to the severity of the banking problem is not just an American phenomenon, it is also a European thing too.”

    Please clarify, what was the long-term outcome of the Swedish solution? If they’re not using it today, why not?

    1. Edward Harrison Post author

      They aren’t using it for the same reasons the U.S. is not. It’s politically easier to try to let banks recapitalize themselves via high margin spreads (borrowing short and lending long in a steep yield-curve environment).

      The problem for banks is always that they lend long – and that means you can never know the true extent of future losses. That gives an accountant a lot of room for playing with the numbers. Writedowns are just an estimate of loan impairment of unrecoverable asset value. So all a bank has to do is pretend that assets are only temporarily impaired.

      You’ve heard the term ‘extend and pretend.’ That’s what it’s all about – extending the term of the loan so that even if the asset is eventually written down, the profits earned in the interim will restore the bank’s lost capital.

      The key is asset prices and accounting standards. If asset prices fail to rise, writedowns are going to come sooner than later – and that means insolvency for some banks.

      If regulators allow banks to pretend their assets don’t need to be written down as they did in the early 1980s, the problem could be much larger down the line, as it indeed was when the S&L crisis finally blew up – especially if asset prices (the loan collateral) don’t rise.

      So, in Sweden, the hope is the economy in the Baltics improves and loan writedowns are minimized. If so, the most exposed Swedish banks (Swedbank and SEB) can weather the storm.

  6. Bruce Krasting

    I don’t think the Swedish 1992 story is relevant. That was a local problem. We have a global problem. Sweden was a very small issue. We are facing something that is impacting all of the industrial countries.

    The Swedish road map will not work today. As you suggest, Sweden is back into soup from their exposure to the Baltics. the old tools will not work this time.

    1. Edward Harrison Post author

      Bruce,

      That’s not a very detailed answer. The Swedish road map was predicated on asset writedown. That’s the crux of my argument as I have said here in the comments.

      Are you saying that suspending FAS 157 and delaying 167 and thus pretending the writedowns don’t need to be taken is the right response? I have to assume this unless you can tell me what about the early 1990s Swedish response is inadequate.

  7. aigle.sage

    There is a major difference between now and 1990. John of generationaldynamics.com would say that the people at the rudder are not the same any more. In 1990 they had memories of the depression and WW2 whereas today these memories have vanished.

    I perfectly remember your article published in summer 2008 about the Swedish answer to their banking crisis. I discovered John’s site and theories inbetween.

    To me the very different answer to the same problem by the Swedes then and now is one of the clearest clue that there is something in John’s theories. And BTW let us not forget the French who also behave differently now and then, as in 1993 we had the collapse of Credit Lyonnais.

    1. Edward Harrison Post author

      thanks aigle.sage. I will take a look at John’s site. I think there is something to what you’re saying about psychology and the fading memory of crisis (or war, for that matter).

  8. Hilario

    You should look at the way the Norwegians did in the 1990s – even more banker unfriendly than the Swedish approach, and just as effective.

  9. Siggy

    The call for a ‘Resolution Authority’ and super Regulator of Systemic Risk is interesting and it certainly goes to the heart of the problem while sidestepping the real difficulty.

    The problem is global and it is at its core massive amounts of debt that cannot be serviced where the borrower has no assets against which the loan can be extinguished.

    Look to the problem with Greece. The European Union can’t agree as to how to deal with the debt that Greece is incapable of servicing. It may be that the holders of that debt will have to take the write off. Who are they? They will be the greatest resistors to writedowns and the greatest demanders of retribution.

    For the US, our debt, US and privately held, is held world wide. What’s it worth in the current market? Denial is the order of the day. Under capitalization is the order of the day. No one has sufficient capital to absorb the write downs.

    Ultimately you’ll have to look at the fiat currencies and the concept of fractional reserves. There lies the core of the problem.

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