And because the $800 billion fiscal stimulus that Congress and the Obama administration enacted in early 2009 consisted mostly of special, one-time programs, it took months for many of them to begin pumping money into the economy, thus kicking in months or even years after the economy had collapsed, and the spending expired without regard to whether the need remained.
When spending to cushion economic blows happens as part of a more carefully designed set of programs established during good times, it can be ready to go quickly right when the economy turns, and can be designed to taper off when it makes sense economically, such as when the jobless rate has fallen, rather than on some arbitrary date. And that can be true even for a safety net that is smaller than Sweden’s.
3. Use monetary policy aggressively
The Federal Reserve has won both plaudits and criticism for responding aggressively to the financial crisis, pumping money into the financial system in epic fashion. But by one key measure, the Swedish central bank was even more aggressive.
Like the Fed, the Riksbank lowered its target short-term interest rate nearly to zero. But it also expanded the size of its balance sheet more than the Fed did relative to the size of its economy, flooding the financial system with even more cash during the height of the crisis.
In summer 2009, the Riksbank had assets on its balance sheet equivalent to more than 25 percent of the nation’s gross domestic product. For the Fed, that level never got much over 15 percent.
In 2009, the Riksbank even moved one key interest rate it manages below zero. Under this negative interest rate, banks that parked money at the central bank actually had to pay 0.25 percent for the privilege. That made them all the more eager to lend the money to one another rather than park it at the central bank, though in practice, Swedish officials and bankers said that the negative rate had more symbolic consequences than practical ones.
The impact of low rates on the economy, however, are clear.
“Interest rates fell very low, and households had more money available for consumption because their mortgage payments dropped,” said Lena Hagman, chief economist of Almega, an association of major employers in Sweden’s services sector.
The Riksbank had the flexibility to move so aggressively in large part because of changes it made in the wake of the early 1990s crisis. At the time, the nation had experienced years of double-digit inflation and the central bank lacked credibility on financial markets. At one point, it raised its target interest rate to a stunning 500 percent in a futile effort to maintain the value of the Swedish currency, the krona.