How Another Country Handled a Similar Crisis

By Tom Lydon | October 16, 2008 | 5:48 PM | 0 Comments

It appears that we've entered a period in the market where truly no one knows what's going to happen next. We've had days with 1,000-point swings, days of record losses, days of record gains. Who knows what tomorrow, next week, or next month will bring?

We're not the first country to have a financial crisis, and we won't be the last. One thing we can do to try and gauge where our economy stands and what the future might look like is to look at some other industrialized nations that faced their own problems and emerged out the other side relatively unscathed.

Sweden is a great example: in 1992, the country's economy was so far down in the hole that its banking system was almost obsolete. A whole host of factors were to blame, including short-sighted economic policy and a property boom.

Sweden didn't enact a bailout plan, though. There was no buying of bad debt or financial institutions. Instead, banks wrote down losses and issued warrants to the government. This tactic held the banks responsible and made the goverment an owner. Distressed assets were sold off and taxpayers reaped the rewards.

The government also was able to recoup more money down the line as it sold its shares. The final cost to the country was 2% of its gross domestic product. The whole plan is outlined in a story by Carter Dougherty for the New York Times. 

The $250 billion plan by the Treasury hearkens back to the way Sweden dealt with its own crisis, and has been favored by economists over the $700 billion bailout plan. The move is said to be "limited and temporary," not a plan to take over the free market. Banks will have the opportunity to buy back their shares once the markets stabilize.

If Sweden's success is any indication, this should be of some comfort to worried investors.

 

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