Friday, September 26, 2008

What Bernanke and Paulson Can Learn From Sweden's Financial Crash

"A banking system in crisis after the collapse of a housing bubble. An economy hemorrhaging jobs. A market-oriented government struggling to stem the panic. Sound familiar?

"It does to Sweden. The country was so far in the hole in 1992 — after years of imprudent regulation, short-sighted economic policy and the end of its property boom — that its banking system was, for all practical purposes, insolvent."

I came across this article by Carter Dougherty in the New York Times on Tuesday, and found it very interesting.

But before we go on to the rest of the article:

Last night, I attended an debate at Washington State University. One of the speakers in The Great Election Debate was writer and activist Cliff Kincaid, who said more than once that the 700 billion-dollar plan proposed by Treasury Secretary Henry Paulson, Fed Chairmen Ben Bernanke and the Bush White House is not a bailout , but socialism.

Socialism is widely understood to mean state or collective ownership and administration of the means of production and distribution of goods, including banks.

I grew up in a country that some have called labeled a socialist democracy. In Singapore, the government does own some banks and the like, including a very successful investment company, called Temasek Holdings. With a multinational staff of more than 300 people, it manages a portfolio of about S$185 billion, or more than US$127 billion, focused primarily in Asia. It is an active shareholder and investor in such sectors as banking & financial services, real estate, transportation & logistics, infrastructure, telecommunications & media, bioscience & healthcare, education, consumer & lifestyle, engineering & technology, as well as energy & resources. In 2008, The Economist reported that Morgan Stanley had estimated the fund's assets at US$159.2 billion. Late last year Temasek threw a 5 billion-dollar lifeline to Merrill Lynch.

All right - back to the NYT aritcle. Here's where the Swedish experience does include socialist principles.

Dougherty writes:

"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.

"That strategy held banks responsible and turned the government into an owner. When distressed assets were sold, the profits flowed to taxpayers, and the government was able to recoup more money later by selling its shares in the companies as well.

'“If I go into a bank,” said Bo Lundgren, who was Sweden’s finance minister at the time, “I’d rather get equity so that there is some upside for the taxpayer.”

"Sweden spent 4 percent of its gross domestic product, or 65 billion kronor, the equivalent of $11.7 billion at the time, or $18.3 billion in today’s dollars, to rescue ailing banks. That is slightly less, proportionate to the national economy, than the $700 billion, or roughly 5 percent of gross domestic product, that the Bush administration estimates its own move will cost in the United States.

"But the final cost to Sweden ended up being less than 2 percent of its G.D.P. Some officials say they believe it was closer to zero, depending on how certain rates of return are calculated.

"The tumultuous events of the last few weeks have produced a lot of tight-lipped nods in Stockholm. Mr. Lundgren even made the rounds in New York in early September, explaining what the country did in the early 1990s.

"A few American commentators have proposed that the United States government extract equity from banks as a price for their rescue. But it does not seem to be under serious consideration yet in the Bush administration or Congress.

"The reason is not quite clear. The government has already swapped its sovereign guarantee for equity in Fannie Mae and Freddie Mac, the mortgage finance institutions, and the American International Group, the global insurance giant.

"Putting taxpayers on the hook without anything in return could be a mistake, said Urban Backstrom, a senior Swedish finance ministry official at the time. “The public will not support a plan if you leave the former shareholders with anything,” he said.

"The Swedish crisis had strikingly similar origins to the American one, and its neighbors, Norway and Finland, were hobbled to the point of needing a government bailout to escape the morass as well.

"Financial deregulation in the 1980s fed a frenzy of real estate lending by Sweden’s banks, which did not worry enough about whether the value of their collateral might evaporate in tougher times.

"Property prices imploded. The bubble deflated fast in 1991 and 1992. A vain effort to defend Sweden’s currency, the krona, caused overnight interest rates to spike at one point to 500 percent. The Swedish economy contracted for two consecutive years after a long expansion, and unemployment, at 3 percent in 1990, quadrupled in three years.

"After a series of bank failures and ad hoc solutions, the moment of truth arrived in September 1992, when the government of Prime Minister Carl Bildt decided it was time to clear the decks.

"Standing shoulder-to-shoulder with the opposition center-left, Mr. Bildt’s conservative government announced that the Swedish state would guarantee all bank deposits and creditors of the nation’s 114 banks. Sweden formed a new agency to supervise institutions that needed recapitalization, and another that sold off the assets, mainly real estate, that the banks held as collateral.

"Sweden told its banks to write down their losses promptly before coming to the state for recapitalization. Facing its own problem later in the decade, Japan made the mistake of dragging this process out, delaying a solution for years.

"Then came the imperative to bleed shareholders first. Mr. Lundgren recalls a conversation with Peter Wallenberg, at the time chairman of SEB, Sweden’s largest bank. Mr. Wallenberg, the scion of the country’s most famous family and steward of large chunks of its economy, heard that there would be no sacred cows.

"The Wallenbergs turned around and arranged a recapitalization on their own, obviating the need for a bailout. SEB turned a profit the following year, 1993.

“For every krona we put into the bank, we wanted the same influence,” Mr. Lundgren said. “That ensured that we did not have to go into certain banks at all.”

"By the end of the crisis, the Swedish government had seized a vast portion of the banking sector, and the agency had mostly fulfilled its hard-nosed mandate to drain share capital before injecting cash. When markets stabilized, the Swedish state then reaped the benefits by taking the banks public again.

"More money may yet come into official coffers. The government still owns 19.9 percent of Nordea, a Stockholm bank that was fully nationalized and is now a highly regarded giant in Scandinavia and the Baltic Sea region.

"The politics of Sweden’s crisis management were similarly tough-minded, though much quieter.

"Soon after the plan was announced, the Swedish government found that international confidence returned more quickly than expected, easing pressure on its currency and bringing money back into the country. The center-left opposition, while wary that the government might yet let the banks off the hook, made its points about penalizing shareholders privately.

'“The only thing that held back an avalanche was the hope that the system was holding,” said Leif Pagrotzky, a senior member of the opposition at the time. “In public we stuck together 100 percent, but we fought behind the scenes.”'

Here's a link to Dougherty's article in the New York Times.

Sunday, September 7, 2008

Biden, McCain, Obama, Palin....What The Tickets Reveal

No partisan red meat offered in this post....this is the vegetarian option. (Hence, the listing of names in alphabetical order.)

I really enjoyed two opinion pieces in the Washington Post this weekend. We all keep hearing how the tickets and candidates differ, but in these politically charged weeks, it's nice to take a step back and examine what the Democratic and Republican tickets have in common.

First, David Ignatius writes:

"There's something lovable about the way this year's never-ending political campaign has turned out.

"We now have two presidential tickets that display the American rainbow in all its eccentric colors. It's as raw and real, and as unlikely, as the nation itself: On one side a suave, aloof African American, twinned with a loquacious Catholic whose manner evokes his blue-collar roots; on the other, a certified war hero paired with a young woman from Alaska who looks like the heroine of a country music song and earns her reputation both as a beauty-contest charmer and a political "barracuda."

"Best of all, these four people are each, in different ways, American rebels. They have all made their way challenging conventional wisdom, telling off the know-it-alls, making a place for themselves and their ideas. They all retained their individuality in a political culture that tends to grind down candidates until they are palpable phonies. That didn't happen with these four -- whatever you think of them, they are who they claim to be.

"Stand back a minute and consider what this often shrill and partisan campaign process has produced: The two parties converged toward the center, selecting in Barack Obama and John McCain presidential candidates who promised they would work across party lines to break the gridlock in Washington. The dividers lost.

The victors were a change agent and a maverick. And each of them picked someone who shared his instinct to challenge the status quo.

"It's a refreshingly upside-down composite picture: The African American candidate is the most conventional of the lot, with his Columbia-Harvard pedigree and his elegant Princeton-Harvard wife and their picture-perfect children. It's the gal from Alaska, Sarah Palin, who reminds us of how messy the real world is, with her special-needs child passed from hand to hand, her pregnant teenage daughter and the hockey-star boyfriend/father who looks, weirdly, like he just won the lottery.

"And old John McCain, eyes flashing, tighter than a tick, just like old Gramps when he's about to take a verbal shot at someone he thinks is a jerk. And motor-mouth Joe Biden, who can't stop saying what he thinks, even if it's to applaud how well his rival, Palin, did in cutting up Obama during her acceptance speech.

"I'm sorry, but this is an American family portrait I like."

Here's the full piece, A Tapestry In Two Tickets.

Next, Andrew J. Cherlin makes the observation that despite the candidates' attempts to convince Americans that their families were just like ours, they were undone by a 21st-century reality: There is no typical family anymore.

"In fact, the diversity of American households was the unspoken lesson of both conventions, as four strikingly different kinds of families came into view. First, the Obamas. The Democratic nominee's half-sister, Maya Soetoro-Ng, spoke to the Denver crowd, highlighting his biracial family background, dominated by an often single mother and a largely absent father. Obama's wife Michelle also took a powerful turn at the podium, focusing on her husband's biography but also playing up her own high-powered career and modest roots. The Bidens were introduced to a national audience that week as well, a stepfamily formed after the tragic death of the senator's first wife. With the McCains, we see another stepfamily, formed this time after the senator's divorce. Their family also includes Bridget, a daughter adopted from Bangladesh. And the Palins bring to the stage two working parents with five children, including a pregnant teenager and an infant with Down syndrome."

"(N)ever has such an extraordinary range of family histories been center stage."

Here's the Washington Post article.

Thursday, September 4, 2008

Really, What DOES a Vice President Do Anyway?

Vice-Presidential hopeful Sarah Palin in July:

From government classes in high school, most of us remember that the only responsibilities assigned to the Vice-President by the U.S. Constitution are:

a) To assume the "powers and duties" of the presidency, should the president die or become disabled while in office; and

b) To preside over the Senate, casting tie-breaker votes in the body when needed.

Regarding a): thirteen vice presidents have gone on to become president, eight because of the death of a president. (The rest were elected to the office.)

So what else does the No. 2 have to do?

Here's some wisdom from someone who ought to know.

Former senator, former vice president, and, of course, the first presidential candidate to select a woman as his running mate, Walter Mondale was quoted in the New York Times on Wednesday:

Whether Republicans or Democrats win in November, “there will be messes on the Hill. And that’s what I did a lot of as vice president,’’ he said. “I spent a lot of time cleaning up messes on the Hill.’’

The second is to act as an early-warning radar for brewing problems – which means having deep connections in the government, with people honest enough to say things they might not say to the president. Ms. Palin, he said, “seems like a lovely person’’ but is so detached from Washington that she is unlikely to serve in that role.

The third, he said, is to “extend the president’s power abroad.’’ When he was vice president to Jimmy Carter, he noted, he spent a lot of time in the Middle East, and dealing with the Chinese. (Under President Clinton, he came back to government to serve as ambassador to Japan, and he played a significant behind-the-scenes role managing the first nuclear crisis with North Korea, in 1994.)

Then there’s the unglamorous part of the job, he said. “Remember, the vice president is the only other officer of the government without a bureaucratic constituency. You have to be able to hear out all sides, and know how what you’re hearing is being affected’’ as members of the cabinet maneuver for more budget, or more authority. Full article.

Clearly, one role all modern vice-presidential candidates must play is in campaigning. In Governor Palin's case, she is helping to motivate the right wing of her party. The fervent applause given after her speech to the Republican National Convention shows that she is well primed for this particular task.

Here are some interesting bits about Vice-Presidents:

Nine succeeded to the Presidency:

John Tyler became President when William Harrison died. Chose not to seek full term.
Millard Fillmore became President when Zachary Taylor died. Sought the Whig nomination in 1852, but lost to Winfield Scott. Four years later, ran and lost as the candidate of the American and Whig Parties.
Andrew Johnson became President when Abraham Lincoln was assassinated. Sought the Democratic nomination in 1868, but was unsuccessful.
Chester A. Arthur became President when James Garfield was assassinated. Sought a full term, but was not re-nominated.
Theodore Roosevelt became President when William McKinley was assassinated; then was elected to full term. Did not seek re-election. Four years after leaving office, ran again and lost.
Calvin Coolidge became President when Warren Harding died; then was elected to full term. Did not seek re-election.
Harry S. Truman became President when Franklin D. Roosevelt died; then was elected to full term.
Lyndon B. Johnson became President when John F. Kennedy was assassinated; then was elected to full term. Did not seek re-election.
Gerald Ford became President when Richard Nixon resigned; then lost election to full term.

Four sitting Vice Presidents were elected President:

John Adams (1789–1797) was elected President in 1796.
Thomas Jefferson (1797–1801) was elected President in 1800.
Martin Van Buren (1833–1837) was elected President in 1836.
George H. W. Bush (1981–1989) was elected President in 1988.

Previous positions:
Every vice president as of 2008 except John Adams, Chester A. Arthur, Henry A. Wallace and Garret Hobart has served as a congressman, senator, or governor.

There's more Veep trivia in this article.