Justin Fox, way ahead of the curve, called for the Swedish model to deal with the financial crisis way back at the beginning of the year. The Swedish model is:
recapitalizing banks (in exchange for equity stakes), temporarily guaranteeing all deposits, and guaranteeing all bank debt maturing in the next 36 months or so.
aka temporary nationalization recup (most of) the losses and then re-privatize with new stricter regulatory schemes in place.
As the Markets continue to nosedive (Dow under 8,000 as of this morning), it is clear the Paulson plan–even the modified one that passed through Congress–has been a more or less complete failure. The market, as they say, has spoken.
Meanwhile there are some conflicting reports, as Fox links to some suggesting a move towards the Swedish model (which should have been done from the start) and this via Krugman:
[Dana Perino, White House Spokeswoman Speaking]:
“Economic officials are aggressively taking every action,’’ she said. “The Treasury is moving quickly to use new tools to improve liquidity, which is the root cause of this problem.’’
As Krugman notes:
And by the way: liquidity is not the root cause of this problem. It’s terrifying that the Bush administration still thinks it is.
Naked Capitalism’s Yves Smith in this informative Bloggingheads (w/ Daniel Gross) points out that studies of panics/sell offs always point to one and only one effective instrument: let the assets drop and capitlalize the banks. [i.e. The Swedish Model]. The Paulson model which stupidly believed that somehow buying the bad debt (liquidity) was the same as capitalization is almost beyond belief and terrfying as Krugman says, correctly.
The Paulson plan only seems to make sense if you want to bail out your rich buddy bad investor friends. Or if you are John McCain, your rich real estate banking interest friends.
the time when the situation might have been salvaged by passive capital injections like the acquisition of preferred shares has passed. Only direct public control, combined with a commitment to salvage the financial system as a whole has any chance of success.
Quiggin’s own plan for nationalization is here.
John Cole, for a time, was calling himself Comrade. Look for its return.
Update I: Worth pointing out that when Fox made the initial call for Swedish-ization, Paul Krugman had some pushback and said it would cost–by the then astronomical figure of–$850 billion.
Fox’s response (and oh what could have been):
[A]n $850 billion price tag attached to a cleanup that resolves most of the current credit problems, wipes out the shareholders of insolvent institutions, and leaves us with a more rational regulatory setup (as the Swedish bailout seems to have done) actually sounds like a pretty good deal to me.
$850 bn is looking pretty cheap at this point.