the last book I ever read (Confidence Men, a book that presages Occupy Wall Street, sampled in five parts): sample two

from Confidence Men: Wall Street, Washington, and the Education of a President by Ron Suskind:

Obama’s response to this cul-de-sac: outside readings. Rather than “first, do no harm,” by the first week of February his preferred phrase was “Sweden not Japan.”
Though neither country’s experience is cleanly applicable to that of the United States, by far the world’s largest economy, the experience of each country seemed to present a set of choices.

Sweden had deregulated its financial industry in the early 1980s, much like the United States, creating a bonanza of speculation in new securities tied to housing, and inflating a massive real estate bubble that finally burst in 1991. In circumstances that eerily similar to those in the United States, credit then froze in an economy that was heavily overleveraged with debt. Values plummeted, from both a crisis of liquidity and a massive correction in inflated prices.

After two rounds of bank bailouts, which seemed at first to be working only to prove inadequate, Sweden temporarily nationalized its banks. Shareholders were wiped out, management teams were generally ousted, troubled assets were auctioned off, and the banks reemerged with the government as a large equity owner. Crucially, though, confidence in the system was quickly restored. Sweden, with this tough-love approach, roared back to strong growth through the decade. The government reduced its ownership in the banks, year by year, as they slowly returned to health and sound practices. In essence, Sweden restored its banks by a kind of enforced prudence.

At the same time, half a world away, Japan was experiencing a similar set of disasters from the bursting of its 1980s real estate bubble. The major difference? What Sweden had started—and then reversed—Japan kept doing: it kept bailing out its insolvent banks with government support and cash infusions. There were ups and downs across years, times when the banks seemed to be on the mend, and then fell back. The idea was for the banking system to stay intact and earn its way back to health by slowly reducing its toxic assets as it resumed lending. This never happened. Japan limped along for what was called its “lost decade,” the 1990s, with virtually no economic growth, a situation of sluggish economic activity that continues up until the present day.

New York Times columnist Paul Krugman had been developing both edges of the analogy since a few weeks after the September 2008 meltdown, when he wrote on his widely read blog that a temporary nationalization of the banks, as the Swedes had successfully done, was the only sound remedy to the crisis, but one that “won’t be possible until January 21”—when, he hoped, Obama would be president.

Just as Obama was firmly opening a mid-October lead that would all but assure him the presidency, Krugman also won a prize, the Nobel Prize for Economics, which gilded the columnist with a rarified credibility ideally suited to the moment. While Krugman’s longtime competitor, Summers, assumed the role of senior economic adviser, Krugman was suddenly the voice, twice weekly, of the progressive alternative. While in Stockholm in mid-December to accept the prize, Krugman wanted that “the scenario I fear is that we’ll see, for the whole world, an equivalent of Japan’s lost decade, the 1990s—that we’ll see a world of zero interest rates, deflation, no sign of recovery, and it will just go on for a very extended period,” a bleak outcome that might result if the United States followed Japan’s path of largely unconditional support for “too big to fail” banks.