The price of the rescue plan was set at 65 billion krona, or $18.3 billion in today’s dollars, which was then 4 percent of the country’s GDP. As of 1996, that total cost was down to 2 percent GDP after loans were recouped and the last of the bad assets had been sold off. Many economists have argued that if you factor in the country’s continued stake in the nationalized bank, now called Nordea, Sweden ultimately broke even.
The amazing thing about the success of this plan is that although it was announced in September of 1992, no legislation was passed until December. The fact that the two political parties had come together so completely was good enough to inspire public confidence in the banking sector.
“This broad political consensus was I believe of vital importance and made the prompt handling of the financial crisis possible,” said Urban Bäckström, Sweden’s Central Bank chairman from 1994 to 2002, during a speech to a Federal Reserve symposium in 1997.
Sweden ultimately did relent and devalue its currency in November 1992, a decision that had the unexpected and happy effect of leading to a two-decade long trade boom with exports doubling as a percentage of GDP from 1992 to 2008. But Stockholm School of Economics’s Englund says that the key to resolving the initial crisis was still the decisive joint-rescue plan. “The remarkable thing here was that you got all important politicians, all important parties in Parliament [to come] together,” Englund said. “That was the single most important thing.”
Contrast this with how we handled our financial crisis in the United States. After Lehman went bankrupt, Treasury Secretary Henry Paulson designed an ad hoc $700 billion bailout package, without much in the way of strings attached, and presented it to Congress in the midst of the country’s worst financial panic in 80 years. Nancy Pelosi, who had agreed with the Bush administration on the terms of the bailout deal just the day before, gave a speech right before the House was supposed to vote on the bill demagoguing the issue and blaming Bush for the economic calamity. House Republicans used Pelosi’s speech as an excuse to vote down their own party’s plan and the single worst trading day in 20 years ensued.
The bill was eventually passed one week later. While the program ultimately succeeded in restoring market confidence, and only cost taxpayers a fraction of its original price tag, the legislation was a disaster from a political standpoint. "The extreme unpopularity of TARP has made it all but impossible to do anything remotely like it again," Princeton economist Alan Blinder wrote about the legacy of the bill. The fact that the financial sector has recovered more quickly and comprehensively than the broader economy after causing the disaster certainly hasn’t enamored the public to TARP.
In Sweden, on the other hand, the rescue package was viewed universally as a success. The political parties came together and did what was necessary to save the system, while at the same time insisting on extracting something out of the banks. The result was that the Social Democratic minority party was able to win back the reins of government in the next election running on the idea that it had done what was in the national interest during Sweden’s darkest hour.
“That was really part of that trademark as a party and I think it was on their part a rational calculation on how the voters would regard them,” Englund said. “In Swedish politics you gain votes by appearing responsible.”
The initial unity and the shared experience of trial by fire had a lasting impact on both of the nation’s leading political parties. The strength of the recovery allowed the Swedish government to put into place long-term structural and policy reforms with principles from both parties. The vast Swedish social state was trimmed through a series of reforms to pension insurance and unemployment benefits, while Sweden’s generous national health-care benefits and strong public education system were left intact. There was tax reform that broadened the tax base and cut rates but also raised taxes on dividends and capital gains. Perhaps most importantly, an unofficial budget rule was established that required that the government stick to a 1 percent average annual budget surplus. Both parties have been able to stick to this rule, despite no official mechanism for enforcing it, because of its widespread political appeal.
“Rules are important, but even more important is actually that all major parties in the Swedish Parliament [are] supporting responsible fiscal policy,” said the current conservative Finance Minister Anders Borg in a speech in Washington, D.C., earlier this year. “We obviously have a lot of political battles, but they are fought inside a framework where we are sticking to stringent budget policies as a starting point. Obviously this could change, but today we have almost an 80-90 percent support for a balanced budget among the voters, particularly Social Democratic voters.”