Thursday, April 3, 2008

Who has The Solution to the Housing Crisis? Sweden!

Well I spend hours each day doing research for this blog by reading the best financial publications out there as well as talking to contacts that I have on Wall St. So I was excited yesterday because I came across one of the best solutions to the housing crisis that i have read so far and where did I find it? THE USA TODAY!!

I want to pull some pieces from the article and comment on them. Sweden had the exact same crisis in the early 1990's as the USA TODAY explains:

IMPORTANT NOTE: Before the government intervention, look what happened to housing prices in Sweden:

"By late 1991 there were indications that two of Sweden's major banks had exhausted their capital reserves and were barreling toward bankruptcy. Property prices, which once seemed capable only of rising, plunged by 50% in 18 months.

"In the early 1990s, a massive Swedish real estate bubble burst, littering the Nordic economy with broken finance companies, failing businesses and jobless workers. It was the first systemic banking crisis in an industrialized country since the 1930s and it saw the Swedish economy actually shrink for three straight years — something that hasn't happened in the United States since the rapid demobilization after World War II.
The Swedish and American crises share many traits: Both followed periods of financial deregulation, and both featured newly daring banks relying upon bookkeeping maneuvers to take on unsustainable amounts of debt. Happily, despite economic conditions that were far worse than in the USA today — and unlike a similar episode in Japan — Sweden quickly recovered."

WOW sound familiar? So what did they do to fix it? Nationalized their banks and used taxpayer money to work there way out of it as explained here:

"Yet, it did so in a manner that would be highly controversial in the United States. Sweden used taxpayer money — and lots of it — to rebuild its wounded banks. "In Sweden's case, the solution ultimately ended up on the government's balance sheet. … The government ended up recapitalizing the system," says economist David Rosenberg of Merrill Lynch. "There's a lesson here."
Sweden's successful crisis management may offer a road map for U.S. officials. But the Swedish cleanup wasn't cheap. It cost the public an estimated 6% of annual economic output; an equivalent bill for the U.S. today would be nearly $850 billion. And Sweden was able to implement a free-spending government rescue only because of a broad political consensus that is difficult to imagine amid the hyper-partisan atmosphere of a U.S. presidential election year."

Now this bailout would infuriate most Americans, however Sweden was smart and added a little twist:

Fearing that a collapse of the banking sector would capsize the economy, the Swedish government in September 1992 issued a blanket guarantee of all of the banks' obligations. Depositors, lenders and trading partners would be protected from loss. But to avoid encouraging financially risky behavior in the future, shareholders were made to suffer. In return for public money, the government received equity in the banks while the existing owners saw their stakes reduced.

Such a guarantee makes the government a part-owner of the country's major financial institutions. In Sweden, for example, at the height of the crisis, the government held 22% of the banking system. When the crisis eased and banks returned to profitability, the Swedish taxpayer shared in the gains.

My take:

I love this. There are many lessons we can learn here. The first one is Sweden couldn't start to recover until housing prices dropped 50%. I have repeatedly said that we need a 50% drop in the US in the bubble areas before we can start to recover. There is no other way to start the healing process without this.

Another lesson: What the government did here, and I have yet to hear this in Washington, is take ownership of the banks to teach them a lesson. So when the profits started back up on the recovery, the taxpayers were rewarded. This is how you prevent future bubbles. You punish the banks for bad behaviour. This was a brilliant idea!!

Now the big question. Are we already copying Sweden???

I think so. Fanny and Freddie have done about 75% of all home loans the last few months versus 36% during the boom.

Then I look at the Bear Stearns deal. This looks to be right out of the Swedish playbook. One of the Feds own consultants from the article thinks we have already begun to nationalize:

"Bear Stearns looks, to my mind, exactly out of the book how Sweden handled the banking crisis," he says.
Edward Kane, a Boston College finance professor, says the Fed's decision to facilitate the sale by backing $29 billion worth of Bear Stearns' assets is the first sign of what amounts to a government takeover of the financial system. "They've implicitly provided guarantees to any number of these firms. There is a nationalization (occurring). It is implicit and unacknowledged," says Kane, who has consulted for the Fed, the International Monetary Fund and foreign central banks."

"Kane says the U.S. government should embrace the Swedish remedy and issue a formal guarantee of the country's financial institutions, so that taxpayers can benefit from any rebound. "To get the upside, we have to make it explicit. … The public is owed a better description of what's going on than they're getting," he says"

I agree. Why should we let Wall St. keep all of the profits during the recovery? When we have a massive collapse like Sweden did and everyone is crushed by losing 50% equity in their homes, make the banks feel the same pain. Let the Fed takeover a piece of the investment banks and allow the taxpayers to share in the profits when the next housing cycle starts!!!

Its time Wall St. learned a lesson. This is the best answer I have seen to the housing problem. It will be painful as housing drops but at least taxpayers could get something back when we recover. I realize this would be more difficult to pull off because we have so many banks but I think we all know the small handful that should be nationalized.

I think this is a great idea. Solutions like this need to be pushed. Pass it on.

1 comment:

Anonymous said...

And now they have a major housing shortage crisis. Good luck trying to find an apartment in Stockholm. Don't even think about being picky.