[Congressional Record (Bound Edition), Volume 155 (2009), Part 3]
[House]
[Pages 3458-3459]
[From the U.S. Government Publishing Office, www.gpo.gov]




 THE CONTRASTING RESPONSE TO THE COLLAPSE OF THE JAPANESE AND SWEDISH 
                           FINANCIAL SYSTEMS

  The SPEAKER pro tempore. The Chair recognizes the gentleman from 
California (Mr. Daniel E. Lungren) for 5 minutes.
  Mr. DANIEL E. LUNGREN of California. Madam Speaker, in light of the 
announcement of the Treasury Secretary of a new version of the 
financial rescue package, I wish to consider a broader context, 
historical context, perhaps, to gain a better understanding of how we 
may best serve our efforts to stabilize our banking system and unlock 
credit for our path to economic recovery.
  In a recent report by the IMF, there have been a number of financial 
crises in the postwar era indicated. However, two examples stand out as 
relevant to our own difficulties. During the past decade, Japan and 
Sweden suffered financial and economic trauma that involved substantial 
similarities to the current challenges facing us. However, it is the 
nature of the very distinct responses of these two nations which 
warrant our attention.
  Charles Kindleberger, in his classic work ``Manias, Panics, and 
Crashes,'' explains the situation confronting Japan in the early 1990s. 
The bubble in Japan reached its crescendo in 1989. Real estate prices 
had been skyrocketing, and the banks even developed new financial 
instruments like the 100-year, three-generation mortgage. In a story 
that sounds all too familiar, when the bubble burst, Japanese bank 
loans slowed, and as the availability of credit declined, distressed 
sales caused real estate prices to decline. By 1991, stock prices had 
fallen by 60 percent, and it was not until 2003 that the stock prices 
in Japan returned to the level that they had been 20 years earlier.
  To put this into perspective, it will be remembered that seven out of 
10 of the world's largest banks were Japanese at the beginning of the 
1990s. Before the decade was over, these financial giants were 
insolvent. They remained in business only because of an understanding 
that the Japanese government would keep them afloat.
  One of the reasons the comparison of the Japanese and Swedish 
financial bubbles is helpful to us is that it reflects the role of an 
increasingly intertwined global economy. As Kindleberger points out, 
the bubble in Sweden was largely affected by the offshore branches of 
banks headquartered in Tokyo and Osaka. The surge in the flow of loans 
from these banks led to the increase in real estate and stocks in 
Sweden. Before all was said and done, the price of real estate in 
Sweden was to rise even faster than it did in Japan.
  In a presentation of the Kansas City Federal Reserve Bank, Sweden's 
former Central Bank chairman, Urban Backstrom, pointed to a number of 
factors which led to the Swedish bubble-- an expansionary monetary 
policy similar to pre-bubble Japan, a tax policy that favored 
borrowing, sizable current account deficits, and an explosion of 
Swedish debt.
  Within 5 years, the rate of debt to the gross domestic product rose 
from 85 percent to 135 percent. This credit boom led to a resulting 
boom in real estate prices. The speculative bubble had been created, 
and the Swedish economy became vulnerable to an implosion.

                              {time}  1245

  In seeking to rectify policies that had led to high inflation and 
high nominal interest rates, asset prices began to fall and economic 
activity headed south. Between the summers of 1990 and 1993, Swedish 
GDP dropped by 6 percent, unemployment rose to 12 percent, and the 
banking sector had loan losses of 12 percent of the gross domestic 
product. What is perhaps most instructive is for us to consider how 
differently these two nations responded.
  The response of the Japanese government was largely predicated on the 
``understanding'' that it would keep the banks afloat. The absence of 
any systematic overarching policy framework led to what could be best 
characterized as an ad hoc approach. And as a

[[Page 3459]]

consequence, the Japanese financial system consisted of a large number 
of ``zombie banks'' which had the effect of undermining the confidence 
in the banking system. Furthermore, this unwillingness to address the 
reality of insolvent institutions rendered the banking system as a 
whole insolvent.
  The response of the Swedish government to its financial collapse 
contains noteworthy contrast. This was explained by Swedish Central 
Bank Chairman Urban Backstrom. Due to the serious nature of the Swedish 
financial crisis, efforts were made to maintain the bank system's 
liquidity. Significant emphasis was given to the need for transparency 
and a realistic disclosure of expected loan losses. Banks applying for 
support had their assets valued by the Bank Support Authority using 
uniform criteria. In order to minimize the problem of moral hazard, the 
bank guarantee provided protection from losses for all creditors except 
shareholders. A separate authority was set up to administer the bank 
guarantee and to manage the bank that faced solvency problems.
  The clear distinction between the Swedish model and the Japanese 
model was an overarching set of rules rather than a series of ad hoc 
responses. In contrast to their Japanese counterparts, the Swedish 
government quickly wrote down the value of bad assets and did not 
prolong the agony for the economy. Sweden, unlike the Japanese 
government, did not have an understanding that insolvent banks would be 
forever protected. We ought to look at the Swedish model.

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