Sunday, June 26, 2011

The Importance of Learning from Crisis

. Sunday, June 26, 2011

MR points to this piece describing how Sweden has come through the recent financial crisis relatively well. The five reasons given really sum to two:

1. Have a terrible financial crisis fairly recently in your past, and learn from it.

2. Don't join the EMU, and ask the US Fed for help.

After the Swedish financial crisis in the 1990s, they passed a rule that balanced the budget and built up a surplus, and they stuck with it. They left them with plenty of cash to fund "automatic stabilizers" in the welfare state. The central bank also slashed interest rates to zero and pursued quantitative easing more aggressively than the US Fed. The central bank was able to do this, and adjust through the exchange rate rather than wage and price cuts, because it refused to adopt the euro. Meanwhile, the Fed opened up swap lines with the Riksbank that provided enough liquidity to keep the Swedish banking sector afloat. (Another data point that Bernanke has been the world's central banker, just as Kindleberger would've wanted.)

The above two points can lead to hope. Financial crises are painful events, but because of that they can lead to positive medium-run reforms that put the economy back on a proper path. The US political economy has frustrated a lot of folks lately, but we've come through worse crises in the past, as have other countries, and have usually been better for it.


Anonymous said...

Looks like a country used Keynesian policies correctly and that they were possibly rewarded for doing so, suggesting that such policies may have helped them remain one of the most prosperous and pleasant places to live. If so, then the U.S. should embrace Keynesian policies.

The Importance of Learning from Crisis
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