In response to a very good question for ABC News’ Terry Moran, President Barack Obama specifically addressed why he’s rejected a “Swedish” approach to the financial crisis:
There are two countries who have gone through some big financial crises over the last decade or two. One was Japan, which never really acknowledged the scale and magnitude of the problems in their banking system and that resulted in what’s called “The Lost Decade.” They kept on trying to paper over the problems. The markets sort of stayed up because the Japanese government kept on pumping money in. But, eventually, nothing happened and they didn’t see any growth whatsoever.
Sweden, on the other hand, had a problem like this. They took over the banks, nationalized them, got rid of the bad assets, resold the banks and, a couple years later, they were going again. So you’d think looking at it, Sweden looks like a good model. Here’s the problem; Sweden had like five banks. [LAUGHS] We’ve got thousands of banks. You know, the scale of the U.S. economy and the capital markets are so vast and the problems in terms of managing and overseeing anything of that scale, I think, would — our assessment was that it wouldn’t make sense. And we also have different traditions in this country.
Obviously, Sweden has a different set of cultures in terms of how the government relates to markets and America’s different. And we want to retain a strong sense of that private capital fulfilling the core — core investment needs of this country.
And so, what we’ve tried to do is to apply some of the tough love that’s going to be necessary, but do it in a way that’s also recognizing we’ve got big private capital markets and ultimately that’s going to be the key to getting credit flowing again.
Obama makes two arguments here, one about scale and one about national tradition. I think the argument about tradition is clearly true—this is a big barrier to a Swedish-style solution. But I don’t think it’s a valid objection for the President to offer. What he’s describing is precisely the situation I fear; a situation in which public officials are refusing to do what needs to be done out of what amounts to ideological rigidity. This is the United States of America, so we can’t have widespread nationalization even if we should. The argument about scale is different. You could see it being the case that what works in a small open economy wouldn’t work in a large somewhat open one. There are, in fact, lots of situations like that. The sort of unilateral fiscal stimulus we’re attempting isn’t really appropriate to small open economies. So I could be convinced that this is correct. On the other hand, it’s not clear to me what about the Obama/Geithner alternative to nationalization actually meets this problem. It’s inherently more difficult to conduct oversight and administration in the United States, which really could make it harder to make nationalization work. But the Obama/Geithner alternative will also work poorly unless oversight and administration can be made to work. This amounts to saying “just because nationalization worked in Sweden doesn’t mean it’ll necessarily work here, so I’ll try something else that also might not won’t work.” The reasoning doesn’t go through without the first consideration—we’re not nationalizing the banks because, damnit, we don’t do that sort of thing in the United States. To which I say that nationalizing the banks’ losses doesn’t exactly fit in with American cultural ideas about rugged individualism either.
See also Paul Kedrosky (who I largely agree with but I wouldn’t quite get so irate), Felix Salmon (who’s grateful that unlike Geithner, Bush, or Paulson Obama can at least explain himself in a cogent way), Paul Krugman (who says nationalization is more American than Obama thinks, but who has no credibility since he’s on the Swedish payroll) and Tyler Cowen (who I think agrees with Obama).
My bottom line: Visit the Nordic countries and you’ll be impressed that their civilian public agencies are much more effective than ours. Arguments which observe that things their institutions can do, our institutions might well screw up are valid. At the same time, there are things that require effective public agencies to do that need to be done. In fields like educating poor children, we’re simply not doing them, and a price is paid. But it’s a price that most middle class Americans don’t see or pay personally. If it turns out that we can’t manage a financial panic adequately, we’ll all be paying the price. I don’t think assuming failure in advance and therefore adopting unlikely-to-work policies makes sense. Abraham Lincoln and FDR both asked the government to do things it didn’t have the ability to do; that meant they had to build the institutions.