The early 90’s were an interesting period in financial turmoil. There were several crises brewing around the globe. Some were dealt with swiftly. Others were swept under the rug with the hopes that avoiding pain now would result in a smoothed recovery process. But that’s not exactly how things played out. In Japan, the banking sector was never forced to clear and I believe it contributed significantly to their persistent balance sheet recession.
But in a different region of the world, banks were recapitalized, gutted and spit back out into the market in a matter of years. This was what Sweden did following a massive equity and real estate bubble. I have referred to it as the “Swedish Model” and in 2008 I wrote the Fed several times to attempt to express the vast differences between the two approaches. The Fed obviously chose to ignore the Swedish Model.
The Swedes guaranteed deposits to avoid runs, forced write-downs, performed triage on important banks, liquidated bad banks, and reduced moral hazard as much as possible. GDP was growing at 6% within just a few years and their stock market had rebounded rapidly after a 2 year 50% drop. Zombie banks weren’t allowed to survive and continue dragging the entire economy down.
On CNBC this morning, Meredith Whitney discussed how the US banking system is turning Japanese as zombie banks dominate the market:
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.