Sweden and Japan both blew up at the same time, with the same kind of deficit. But they took very different paths to recover. Sweden did a full audit of the undead banks, forcing them to come cleam about their losses and any toxic debts they may be hiding. They even hauled in teams of forensic accountants from America and elsewhere to do the research. But Japan took the “ask no questions” approach, and kept the banks on its books hoping that a recovery would magic away the toxic debts before anyone else found out. This didn’t work, the banks became the notorious “zombie banks” - they couldn’t raise capital, because the market was too suspicious to lend to them. Sweden took the root canal surgery route, and embarked upon the road to recovery in a few years. Japan delayed going to see the dentist, and confined its people to a lost decade.
No one seems to care about this right now, but I think this is perhaps the single biggest risk Britain faces. Mark Bathgate and myself wrote a cover piece about this a couple of months back. Britain’s banks are not fixed, which is why they keep coming back to tap the taxpayer for more cash. Bailouts are becoming a regular national event. Either the Tories can accept this – you could have the next bailout launched by Girls Aloud at the O2 Centre for example – or they bite the bullet and fix the banks. That means forcing them to disclose what losses they have: then, and only then, will they be able to raise capital properly. If the bank system doesn’t work, the transmission mechanisms won’t work. That is to say, money wont be loaned to the public or small business – and that’s no now, as we’re told in info which is not flagged up properly by the media (see chart 2.6 on p21 of the BoE Inflation Report) and Britain will face the fate of Japan: a decade of false dawns. Liam Halligan has been calling for this measure for some time – and yet it still, as an idea, hasn’t captured the imagination of the media. But economists – even Adam Poulson of the MPC – have been making the point. Without a functioning banking system, Cameron won’t get his recovery. So yes to Swedish schools. Yes to Swedish cuts. But let’s have Swedish bank transparency, too. The alternative is turning Japanese – a fate that no one wants.
PS For a useful overview of the Swedish banking bailout, click here.