Emulate Sweden, Not Japan

The United States and indeed, world financial system faces a starkly comparable situation to Sweden circa 1992, according to equity strategist Michael Hartnett of Merrill Lynch, with two possible recourses of action.

In 1992, the Swedish economy was hemorrhaging jobs while its government tried in vain to stem financial panic in equity markets.

The cause of the crisis? Lackadaisical regulation in the 1980s had fueled a property boom that eventually crashed and left the Scandinavian state's banking system on the verge of insolvency.

In September, 1992, the Swedish government "decided to guarantee the whole banking system and transfer bad debt to state ownership," said Mr. Hartnett in a note to clients on Tuesday.

Heard this before?

This time around, the failure of the first Congressional vote on the Bush administration's bailout measures on Monday worsened the short-term credit situation, to be sure.

But in compounding the crisis, "it increases the likelihood of a Swedish-style re-capitalization of the banking sector in the U.S."

That's a very good thing, said Mr. Hartnett.

In Sweden's case, the "chemotherapeutic event" of 1992 marked the beginning of a multi-year bull market in Swedish equities.

In contrast, Japanese authorities opted for the "morphine" approach of a "Price Keeping Operation" as a similar fate beset Japanese equities in the late 1990s.

The measures — restricting the sale of stocks and injecting companies with public funds as needed to keep share prices buoyed — "condemned Japanese equities to a multi-year bearish trading range," Mr. Hartnett said.

Comments

[currious phil:]

This is exactly what the irish government has just done.

2008 Oct 01 08:04 AM