Why not nationalize, like Sweden?


Because we're not Sweden. 

Tyler Cowen runs through the major objections here.  My thoughts are less specific:  what works in the banking system of a small economy does not necessarily work in a large one.  For starters, no offense to the Swedes, but very few other countries are affected by what happens in their economy.  One family, the Wallenbergs, indirectly controls something like 30-40% of Sweden's GDP.  Even now, the Swedish financial system is considerably less broad and complex than that in the US; it's not a world financial center.  And in 1992, everyon's financial system was a whole lot less complicated than they are now.  The FDIC was an excellent solution for commercial banking (and yes, to all those wondering what happened to the "real libertarian" Megan, I've been saying this for years.)  But its model is not applicable to a world of credit derivatives and broken broker-dealers.

Possibly the biggest problem with this plan, among many, is that Sweden is essentially able to command the labor of its bankers; they have relatively few alternatives without starting over in a new country and a new language.  American government has no such leverage.  Yes, the folks in the mortgage departments royally screwed the pooch, but running a major bank is not something you can hand over to a GS-17.  Nor is it a job for academic economists. 

And, of course, the political ramifications in the United States are very disturbing.  A small homogenous country with a parliamentary system and a lot of social capital invested in the government is going to do better at nationalizations than we will.  The fractious structure of the American legislative system means--as we've just seen--that huge amounts of political maneuvering and log-rolling will go into the running of any national banking system.  Imagine the banking system run by the Department of the Interior.

One readers asks if I'm not, by endorsing the modified Paulson plan, endorsing the failed Japanese model over the Swedish system.  Rather the reverse.  The problem with the Japanese system (or at least, one major problem) is that for political, social, and career reasons, banks kept pouring money into zombie firms, trying to salvage the bad loans of a decade ago.  Is a nationalized banking system less or more likely to do this than a private one, in America?  I imagine any banking head, appointed or career civil service, would get a lot of calls from Senators and congressmen demanding that the bank prevent companies in their districts from going under.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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