In the early part of the 1990s, Sweden faced a similar banking crisis to what the U.S, U.K, and Europe are currently going facing. Sweden took a very different approach than what is currently being done in the U.S and U.K. Sweden's approach ended up being much more successful than what has transpired so far in Europe and America. Perhaps the Swedish solution is the best way to rejuvenate growth in the developed world. Let's take a closer look at just what happened in Sweden.
From as early as 1970, growth in the Swedish economy started to stagnate. In response to a sluggish economy, Sweden tried to stimulate it's economy by easing monetary policy. Credit grew quickly in the Swedish economy, but so to did debt. The credit expansion led to a massive rally in stock prices and real estate prices. However, the rate of debt to GDP also skyrocketed.
The improvement in asset prices allowed for an improvement in the actual economy. The Swedish people spent more and saved less. Ultimately, the debt became to great for the Swedish private sector to manage. In the early 1990s the asset bubble popped, unemployment shot up from 3% to 12%, and banks started to fail.
In response to the crisis, in 1992, the Swedish government decided to guarantee all deposits and creditors within the banking system. However, Sweden did not rescue equity holders. Sweden forced banks to write assets down to their true value before seeking aid. Bank stock holders would be on the hook for loses before the government would get involved.
In return for saving the banks, Sweden got a significant amount of equity in each of the banks it saved. Sweden also allowed unlimited amounts of loans from the central bank to private banks because the entire banking system was guaranteed.
The Swedish solution worked, since taking the pain in the early 1990s the Swedish economy has improved significantly. In 2000, the unemployment rate fell as low at 4.9%, this is a major improvement from the 12% unemployment rate during the crisis. Even today, Sweden's unemployment rate is just 7.5%.
How to apply Swedish solution to today's crisis:
The causes of the current economic crisis in Europe and the U.S are essentially the same as the causes of the Swedish banking crisis. However, to this point we have not hit the "re start" button like Sweden did. Instead, America and Europe are insisting on a slow prolonged solution- similar to what has been going on in Japan for the last decade. Instead of writing mortgage debt down what it's really worth, banks are no longer forced to use mark to market accounting. This allows banks to hold assets on their books at prices that are simply wrong.
Shareholders of major banks have also been saved from taking the true hit that is necessary to restart the system. In Europe, the same game is being play. Sovereign debt of PIIGS is being bailed out, and re-negotiated. Look no further than Greece where the value of the bonds continues to get lowered slowly as bailout after bailout fails to fix the problem.
The best solution to the global debt crisis might actually be a restart. However, a restart does not mean that the system must fail. Sweden allowed many loans to go bad, banks to go bankrupt, and companies to fail, but not the system. Sweden did not defend shareholders, but it defended the system. Similarly, Europe and the U.S should be guaranteeing the system itself rather than the institutions individually.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.