USA Bailout: So, How Much Is $700+ Billion, Anyway? And What Would Sweden Do?

UPDATE #1: See the comments to this post for updated numbers and links.

UPDATE #2: See updates and articles on my 2009-2-12 blog post. Also see this New York Times graphic: The tab is now $8.8 trillion, equivalent to the second largest economy in the world, behind USA at $13+ trillion.

The chart above shows the world’s largest economies (measured by GDP), ranked by size.  Assuming the US bailout is only $700 billion, the bailout is larger than all the economies highlighted in yellow.

Note: The bailout is actually already well over $950 billion if you count $150 billion stimulus package (checks to individual tax payers this spring), Bear Stearns, FannieMae, FreddieMac, and AIG.  If you add in the cost to bail out insured bank depositors and all the others who are lining up, it’s going to be well over $1 trillion. But let’s just call it $700-$800 billion for now.  How much is that?

As shown on the chart above (Wikipedia page here), it’s about the size of the Dutch economy, the 15th largest economy in the world (it shows as #16 on the list because the list counts the EU as #1). That’s a lot of “coffee”!

Remember, GDP (the “economy”) is the total value of ALL goods and services produced by ALL people and entities in a country in a year. All that money, down the drain.  Well, not actually down the drain, but into the pockets of those who profited on the way up (privatize the profits) and will profit and/or not lose as much on the way down (socialize the losses).  Nice.  Ok, I better nip that rant in the bud ’cause I gotta hop in a minute.

Real quick, lets say the bailout cost climbs to $1 trillion, how much is that? Larger than Mexican, Australian, and South Korean economies, getting close to the size of Inda’s and not far from Rusia, Brazil, and Canada.

Yeah, it’s that big…

Go ahead and check out the rest of the list to see all the countries this bailout is larger than.

It’s basically a financial black hole, which is going to suck in a lot more people and countries from around the world before it is all over and things start growing again, which they always do — like when a forest regrows after a fire (or the side of a mountain blowing off, like Mount St. Helens, which may be a better analogy).

Ok, let me wrap things up with a New York Times article (below) and a link to the Alan Greenspan memorial website, AlansBubble.com, which I made years ago, as I (and many others) blogged about his bubble and what would come afterward it (this).

Cheers!

Stopping a Financial Crisis, the Swedish Way
By Carter Dougherty
2008-9-23
New York Times
Correction Appended

A banking system in crisis after the collapse of a housing bubble. An economy hemorrhaging jobs. A market-oriented government struggling to stem the panic. Sound familiar?

It does to Sweden. The country was so far in the hole in 1992 — after years of imprudent regulation, short-sighted economic policy and the end of its property boom — that its banking system was, for all practical purposes, insolvent.

But Sweden took a different course than the one now being proposed by the United States Treasury. And Swedish officials say there are lessons from their own nightmare that Washington may be missing.

Sweden did not just bail out its financial institutions by having the government take over the bad debts. It extracted pounds of flesh from bank shareholders before writing checks. Banks had to write down losses and issue warrants to the government.

That strategy held banks responsible and turned the government into an owner. When distressed assets were sold, the profits flowed to taxpayers, and the government was able to recoup more money later by selling its shares in the companies as well.

“If I go into a bank,” said Bo Lundgren, who was Sweden’s deputy minister of finance at the time, “I’d rather get equity so that there is some upside for the taxpayer.”

Sweden spent 4 percent of its gross domestic product, or 65 billion kronor, the equivalent of $11.7 billion at the time, or $18.3 billion in today’s dollars, to rescue ailing banks. That is slightly less, proportionate to the national economy, than the $700 billion, or roughly 5 percent of gross domestic product, that the Bush administration estimates its own move will cost in the United States.

But the final cost to Sweden ended up being less than 2 percent of its G.D.P. Some officials say they believe it was closer to zero, depending on how certain rates of return are calculated.

The tumultuous events of the last few weeks have produced a lot of tight-lipped nods in Stockholm. Mr. Lundgren even made the rounds in New York in early September, explaining what the country did in the early 1990s.

A few American commentators have proposed that the United States government extract equity from banks as a price for their rescue. But it does not seem to be under serious consideration yet in the Bush administration or Congress.

The reason is not quite clear. The government has already swapped its sovereign guarantee for equity in Fannie Mae and Freddie Mac, the mortgage finance institutions, and the American International Group, the global insurance giant.

Putting taxpayers on the hook without anything in return could be a mistake, said Urban Backstrom, a senior Swedish finance ministry official at the time. “The public will not support a plan if you leave the former shareholders with anything,” he said.

The Swedish crisis had strikingly similar origins to the American one, and its neighbors, Norway and Finland, were hobbled to the point of needing a government bailout to escape the morass as well.

Financial deregulation in the 1980s fed a frenzy of real estate lending by Sweden’s banks, which did not worry enough about whether the value of their collateral might evaporate in tougher times.

Property prices imploded. The bubble deflated fast in 1991 and 1992. A vain effort to defend Sweden’s currency, the krona, caused overnight interest rates to spike at one point to 500 percent. The Swedish economy contracted for two consecutive years after a long expansion, and unemployment, at 3 percent in 1990, quadrupled in three years.

After a series of bank failures and ad hoc solutions, the moment of truth arrived in September 1992, when the government of Prime Minister Carl Bildt decided it was time to clear the decks.

Standing shoulder-to-shoulder with the opposition center-left, Mr. Bildt’s conservative government announced that the Swedish state would guarantee all bank deposits and creditors of the nation’s 114 banks. Sweden formed a new agency to supervise institutions that needed recapitalization, and another that sold off the assets, mainly real estate, that the banks held as collateral.

Sweden told its banks to write down their losses promptly before coming to the state for recapitalization. Facing its own problem later in the decade, Japan made the mistake of dragging this process out, delaying a solution for years.

Then came the imperative to bleed shareholders first. Mr. Lundgren recalls a conversation with Peter Wallenberg, at the time chairman of SEB, Sweden’s largest bank. Mr. Wallenberg, the scion of the country’s most famous family and steward of large chunks of its economy, heard that there would be no sacred cows.

The Wallenbergs turned around and arranged a recapitalization on their own, obviating the need for a bailout. SEB turned a profit the following year, 1993.

“For every krona we put into the bank, we wanted the same influence,” Mr. Lundgren said. “That ensured that we did not have to go into certain banks at all.”

By the end of the crisis, the Swedish government had seized a vast portion of the banking sector, and the agency had mostly fulfilled its hard-nosed mandate to drain share capital before injecting cash. When markets stabilized, the Swedish state then reaped the benefits by taking the banks public again.

More money may yet come into official coffers. The government still owns 19.9 percent of Nordea, a Stockholm bank that was fully nationalized and is now a highly regarded giant in Scandinavia and the Baltic Sea region.

The politics of Sweden’s crisis management were similarly tough-minded, though much quieter.

Soon after the plan was announced, the Swedish government found that international confidence returned more quickly than expected, easing pressure on its currency and bringing money back into the country. The center-left opposition, while wary that the government might yet let the banks off the hook, made its points about penalizing shareholders privately.

“The only thing that held back an avalanche was the hope that the system was holding,” said Leif Pagrotzky, a senior member of the opposition at the time. “In public we stuck together 100 percent, but we fought behind the scenes.”

This article has been revised to reflect the following correction:

Correction: September 27, 2008
An article and a picture caption on Tuesday about Sweden’s response to its 1992 financial crisis misstated the position at the time of Bo Lundgren, who described Sweden’s strategy and commented on the United States’ proposals for resolving its own crisis. He was the deputy minister of finance — not the finance minister, a post held by Anne Wibble.

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