Iceland Solves Banking Crisis by Indicting Bankers, Forcing Mortgage Relief

by Kenneth Thomas

Via Mark Thoma's Economist View, I came across an interesting blog on financial regulation called Trust Your Instincts. Lately, the author, "Richard," has written a set of posts comparing two models of dealing with the financial crisis, which he calls the Swedish model (used by Sweden and Iceland) and the Japanese model (used by Japan, the U.S., and the U.K.).

Here is his description of the two models:

Regular readers know that under the Japanese model losses on the excesses in the financial system are only recognized as banks generate the capital to absorb them.  This is good for banks because the model involves hiding their true condition and pursuing policies designed to boost bank earnings.  It is bad for the economy because it distorts asset prices and access to capital (for proof, look at the performance of Japan's economy). The alternative is a Swedish model that is bad for banks and good for the economy.  It is bad for banks because they are required to recognize the losses on the excesses in the financial system today.  It is good for the economy because it avoids the distortion in asset prices and access to funding associated with hiding the losses under the Japanese model (for proof, look at the performance of Sweden's economy).