The Real Trouble With The Swedish Solution

Over the past 60 hours or so, I’ve increasingly gotten the sense that the Obama administration’s problem with a “Swedish” solution to the banking crisis has less to do with the ideological/managerial concerns that I’ve heard raised and more to do with the simple fact of cost. Nationalizing the banks and then having the federal government take responsibility for their debts could easily entail disbursing over a trillion dollars. The nominal sum involved in Sweden was, of course, much less than that because it’s a smaller country but the point is that even though their plan did work is did cost a fantastic amount of money relative to their GDP. It’s not at all clear that the administration would be able to get congress to agree to appropriations on that scale.

Under the circumstances, it’s understandable that the Obama team is trying to come up with something cheaper. The problem is that what they’re coming up with doesn’t seem to be convincing anyone. And the main alternative to nationalization as a viable rescue plan—the good bank / bad bank scenario Alan Blinder lays out in The New York Times—only exacerbates the cost problem because it makes it harder for the government to recoup anything on the upside. Nationalization and good/bad are very similar, structurally, except in a good/bad scenario the government doesn’t own the equity in the good banks and thus can’t sell them to anyone. It’s a taxpayer gift to the existing equity holders, with the presumed advantage being apolitical management of the resulting banks. But whatever you think of that proposal, it doesn’t get around the fact that you would need a huge sum of money to do it.

So I’m not exactly sure where this leaves us. But I am sure that it’s a lot easier to call for sweeping measures and giant expenditures than it is to contemplate a legislative strategy for making such measures possible.