What are our options beside this $700 billion dollar bailout?

Many prominent economists are looking at history for a bit of guidance versus making an illogical, irrational, fear based decision that may create an potentially larger financial problem. How have other countries whom faced similar crisis’ handled their problems? Sweden seems to be the glaring example of another country whom has faced a similar situation to our own in the early nineties. Below is how they handled the situation and why it is likely better than providing the government with nearly a trillion dollars in discretionary spending financed on the general public’s back.

Sweden and their situation: “Newly deregulated credit markets after 1985 stimulated a competitive process between financial institutions where expansion was given priority. Combined with an expansive macro policy, this contributed to an asset price boom. The subsequent crisis resulted from a highly leveraged private sector being simultaneously hit by three major exogenous events: a shift in monetary policy with an increase in pre-tax interest rates, a tax reform that increased after tax interest rates, and the ERM crisis. Combined with some overinvestment in commercial property, high real interest rates contributed to breaking the boom in real estate prices and triggering a downward price spiral resulting in bankruptcies and massive credit losses. The government rescued the banking system by issuing a general guarantee of bank obligations. The total direct cost to the taxpayer of the salvage has been estimated at around 2 per cent of GDP.” (1)

Wait, this sounds like what we’re doing doesn’t it? Yes, very similar, however, instead of simply pumping in dollars to help the companies pay their bills, the Swedish Government forced the banks to sell off their assets to help meet current bills and drain down shareholder value. Basically, they made the shareholders of the companies take a complete loss before allowing the bank to get aid. So, whatever money the government put in was completely owned by the public through their government. When the banks stabilized and eventually began to turn profits again, the government sold back shares to the public. Whatever they made went against the debt they had incurred.

So, how is this different again then what we’re trying to do? The current proposals on the house floor more or less reward the shareholders of the banks (or insurance company or whatever industry we’re talking about that is proposed to recieve aid) at the cost of the general public versus first forcing the company shareholder to lose their interest. In other words, if you don’t make the true shareholders lose their interest, they stand to benefit twice. This is especially unnerving when it comes to seeing the way those executives prospered in the form of salaries and bonuses off of fake profits in the first place.

Not to mention: Our current proposal, compared to Sweden’s, will cost around 3% more. The Swedish government reassurance in its backing of the financial industry helped curb the runs on banks and unwarranted devaluations of similar company stocks that had little fundamental problems simply because of a credit crunch.

Coming to a theater near you: Credit Card default swaps will be the next mortgage crisis

(1) “The Swedish banking crisis: roots and consequences,”  P Englund
Stockholm School of Economics, Stockholm, Sweden

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