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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