Lundgren provides a recipe for debt crisis management

As Minister for Fiscal and Financial Affairs 1991-94, he was responsible for handling the Swedish financial crisis after a speculation bubble in the late 1980s.

Last March he turned this experience into Congressional testimony, which received major press coverage.In beginning his comments on what he called “the biggest financial crisis since the 1930s”, Lundgren noted that “governments and central banks did most things wrong in the 1930s. This time, they got most things right. In the EU, things went amazingly well.”

In his view, we now have an obligation to arm ourselves with the knowledge of how to prevent or minimize future crises. Systemic crises require intervention by governments and central banks in three key areas.
The first is to counter the lack of confidence and falling liquidity by pumping cash into the system, for example, by issuing treasury bonds or buying mortgage bonds.

The second is to shore up confidence by providing bank guarantees – ensuring that even if bondholders get “haircuts”, they essentially won’t lose money on failing banks. According to Lundgren, the US should have sought a bipartisan consensus on this point, as Sweden did in the early 90s, permitting very rapid development of legislation.

“We shouldn’t bail out bank shareholders,” says Lundgren, “just the normal creditors. This in turn has a beneficial effect on world trade.”

The third step is to deal directly with banks that have bad balance sheets. Governments can and should go in openly, even taking responsibility for banks – as in the case of Northern Rock or Götabanken. The main point is to restore the capital base for lending.

 
Good government should aim for macroeconomic stability, according to Lundgren, but this doesn’t necessarily mean increased regulation. “Every regulation has a cost, but no one discusses it. Capital adequacy rules and liquidity rules all have a cost.  The cost of accumulated regulations could be worse than the occasional crisis.”

“Good banking, on the other hand, is about risk management,” continues Lundgren. “Compensation and bonuses should not promote heavy risk-taking, and supervising authorities should regulate this.”

When it comes to credit default swaps, he is equally firm: “Derivatives are used to manage risk, and we need more transparency in the OTC derivatives markets to prevent speculation. We need less OTC trading and more in exchanges.”

Lundgren sees the proposed special taxes on bankers as a cost with an implication: Should well-run banks subsidize poorly run banks? Whatever measures are taken, in Europe, of course, there is the additional difficulty of determining how to divide responsibility for multinational banks.

Biographical note: While in government, Lundgren was also responsible for tax reforms including abolishing turnover tax on stock trading, wealth tax and double taxation of dividends and capital gains. After serving in government, he was first economic spokesman and later leader of the Moderate party.

Written exclusively for AmCham by Robbin Battison, Battison & Partners 
Photos by Rob Nelson