At least for a while, the bear seems to have buried the bull. Wall Street doesn’t seem as shiny as it used to. The global economy has just recently come out of a deep recession. At a time like this, it is particularly relevant to examine the role of the State in overcoming economic crises. Although government intervention in the matters of a fair free-market is not entirely consistent with the doctrine of economic liberalism which has been today vindicated as a necessity in a free society, in practical terms, it is impossible for the government to be not involved in something so intrinsic to the over-all well being of its subjects. But what can the government do to get the country out of an economic slump?
What many governments have done…….
There can be no easy answer to that question. Government policies are the specific outcomes of specific approaches to specific problems designed to have holistic benefits to the entire society. Very diverse policies have been employed to counter the ill-effects of economic crises. Some have been minimalist in intervening, others have been outright regulatory. Rarely ever does government intervention immediately solve the problem; still rarer are events of complete self-recovery of the market without any government support.
In many ways, the handling of the Swedish Banking crisis of the early 1990’by the Swedish Parliament is an exemplary policy response to an economic crisis. In a purely historical context, the Swedish economic crisis resembles the current global economic crisis due to the similarity in origins despite the glaring disproportion of the size and scope of these crises. Both these crises were preceded by long periods of imprudent financial regulation, asset bubbles and then massive bank failures.
In September 1992, the Swedish government announced a guarantee for all bank deposits and creditors of the nation’s 114 banks, with the support of the Opposition in the Parliament, from which the shareholders of those were excluded. According to Jonung (2009), the bank support was of crucial importance because it guaranteed the durability of the banking system by restoring confidence in the Swedish institutions. The Riksbank (Swedish central bank) ensured unlimited liquidity by effectively acting as a lender of last resort. The Swedish ministry of finance attacked the crisis with a twofold approach. Firstly, ‘Banks in trouble were asked to obtain capital from their shareholders,’ on failure of which, the banks would have been confiscated and brought under public control. This was a crucial part of the recovery package which pushed banks to the edge in their efforts in the battle for survival, thus minimizing the moral hazard problems. This is in sharp contrast to the towering moral hazard problems which the U.S. faces with the corporate bailouts in the automobile and financial industry. Secondly, the finance ministry created the ‘Bank Support Authority’ which...