Speaking of credibility, the Riksbank hasn’t left its ultra-low interest rate policy and large balance sheet in place forever; with its economy recovering nicely, the Swedish central bank has already raised rates, helping maintain its credibility for the next time the economy goes soft.
4. Keep the value of your currency flexible.
Sweden has declined to adopt the euro currency, and in hindsight that looks wise. The changing value of the Swedish krona was a helpful buffer against the economic downdraft of the past few years.
In the depths of the financial crisis, the krona fell in value against both the dollar and the euro, as global investors sought the safety of putting their money in the most widely circulated currencies. That helped make Swedish exporters more competitive at a time when global demand was collapsing, working as a sort of pressure valve.
And now that the Swedish economy is looking up, the free-floating nature of the Swedish krona could hold a different advantage: Neighbor Finland, which also is experiencing solid economic growth, uses the euro. With other parts of Europe in deeper economic distress, it could face inflation, because the European Central Bank sets policy based on the whole of the 17 nation currency zone. By contrast, Sweden’s monetary policy is based only on Swedish economic conditions.
There is a lesson here for the United States as well: Maybe being the global reserve currency isn’t all it’s cracked up to be. During the crisis, the value of the dollar skyrocketed as world investors sought a safe place to put their cash.
That put American exporters at a distinct disadvantage in the global marketplace at the very moment the economy was at its weakest.
5. Bankers will always make blunders; just make sure they don’t doom the economy.
Swedish banks didn’t make it through the 2008 crisis without major losses. To the contrary, they had lent heavily in the Baltic nations of Lithuania, Latvia and Estonia, which suffered an economic collapse.
The banks relied on funding in dollars that they borrowed from other banks — and during the crisis that funding all but disappeared as banks hoarded dollars. Had the Federal Reserve not made billions of dollars available to the Riksbank through “swap lines,” which were then lent to Swedish banks, there surely would have been a devastating collapse of the banking system.
So it’s not that the Swedish banks managed things perfectly. But they experienced more manageable losses than did their counterparts in the United States and much of Europe, and are now back to playing their normal role of making loans and supporting growth.
Swedish financial officials don’t point to any single magic bullet in their regulatory approach. Rather, the Swedish banking system seems to have held up okay because the pain of the early 1990s was severe enough as to scar both bank executives and regulators, leaving them with little temptation to go into risky real estate lending in the mid-2000s, even when the rest of the world was doing just that.
“After the crisis in the ’90s, it was clear we needed to be more conservative and careful,” said Cecilia Hermansson, chief economist of Swedbank. An aphorism often cited, she adds, has been “burn your tongue once on hot milk and you will start blowing on yogurt.”
In other words, although bank bailouts might be necessary to save an economy, it’s also important that bankers not be so cushioned from the consequences of their unwise decisions as to go straight back to the old ways as soon as it’s over. They need to at least have their mouths burned.