BIS: WE HAVE FAILED TO LEARN FROM THE NORDIC CRISIS
by ilene - August 6th, 2010 11:35 am
BIS: WE HAVE FAILED TO LEARN FROM THE NORDIC CRISIS
Courtesy of The Pragmatic Capitalist
The BIS recently released an excellent paper comparing the current crisis to the Nordic crisis. This is a particularly interesting case study because the Nordic credit crisis was relatively clean for a credit crisis. Perhaps most interesting is the fact that their crisis was unfolding at the same time as the Japanese crisis. The results, however, were dramatically different. I believe the thoughts from the BIS are particularly interesting as I was a proponent of the harsher Swedish Model - a bit more of an Austrian economics approach to the crisis as opposed to the Japanese model of trying to ensure capitalism without losers. In recent months the USA is looking more and more Japanese and the BIS believes it is due to our flawed response:
“Our analysis indicates that current policies have followed those (Nordic) principles in some respects, but have fallen short in other, arguably more important, ones. If anything, the authorities have intervened even earlier than in the Nordic precedent. In the current episode, the down-leg of the financial cycle had not proceeded as far and banks were further away from the point of technical insolvency. However, the underlying weakness in balance sheets has not been recognised as fully. Efforts to write down assets and induce underlying adjustment in the sector have not been as extensive. Impaired assets have been kept on balance sheets at highly uncertain, and possibly inflated, values. The conditions attached to financial support have not been as strict with respect to asset and cost reductions; if anything, they have been designed with an eye to sustaining lending. The need to reabsorb the sector’s excess capacity has taken a back seat. All this has tended to slow down resolution.
In other words, the zombie banks live on just as they have in Japan. But perhaps most important is the fact that the losers have not been allowed to lose. Government intervention has only kicked the can down the road. The BIS detailed the successful principles involved in a swift crisis response and sustainable recovery:
Principle 1: Early recognition and intervention
P1: The nature and size of the problems should be recognised early and intervention should follow quickly.The purpose of early recognition and intervention is to avoid a hidden deterioration in conditions that could magnify the costs of the
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the site