from Follow the Money

A new reason to be bullish on America: It is (almost) Sweden

September 30, 2008

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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A Merrill Lynch strategist seems to have come up with a new reason to buy stocks: The US isn’t far from adopting the “Swedish” approach to managing a financial crisis – and that didn’t turn out to be bad for the Swedish market. Forbes reports:

“The failure of TARP legislation worsens the short-term credit situation. But in so doing it increases the likelihood of a Swedish-style recapitalisation of the banking sector in the U.S,’ says Merrill Lynch emerging equities strategist Michael Hartnett. The Swedish government in Sept 1992 decided to guarantee the whole banking system and transfer bad debt to state ownership. ’This chemotherapeutic event marked the beginning of a multi-year bull market in Swedish equities,’ Hartnett says.”

This crisis has produced a lot of surprises.

I never thought I would see the Wall Street that pitched privatization as the solution to most of the emerging world’s problems in the 1990s enthusiastically welcome (partial) state ownership through sovereign wealth funds. That though may have reflected my own naivete. Fees talk; many large fund managers have been close to the big sovereign funds for some time.

I never thought David Brooks would channel Dani Rodrik and warn of the danger of too much capital sloshing around – and imply that financial liberalization had gone too far. That concern presumably extends to too much Chinese central bank money sloshing around; China after all was the ultimate source of a lot of the money sloshing through the US housing market.

But you really know there is a true crisis when parts of the Street are arguing in favor of the (temporary) nationalization of the financial sector.

Who knows, if this continues the Street may soon be arguing for taxing carried interest as income and suggesting that the US might be able to reduce the cost of health care by looking closely at the French model …

On second thought, probably not. That is a bridge (or two) too far.

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