Global Financial Crises, Part II: Norway 1987
Yesterday, we looked at 5 Historical Economic Crises and the USA.
That discussion led to a reader in Norway referring us to this 2005 commentary about the Norwegian Financial Crisis, which began circa 1987. It was the first systemic crisis in a major industrialized country since the 1930s.
As the nearby chart shows, Real Interest rates in Norway were negative from 1980-84. The crisis hit five years later.
In the United States, real interest rates were negative between 2002-03. The crisis hit five years later. (Real Interest rates just flipped negative again in 2008).
The Norwegian banking crisis had several features which will look familiar to any observer considering the present deterioration of the US financial situation. Both can be described as classic boom-bust crises, containing several universal features:
Long Island Financial Iced Tea
• Deregulation and liberalization paved the way for the boom
• Macroeconomic policies were largely pro-cyclical
• Lending growth became exceptionally strong
• Prudential capital regulations were relaxed
• Regulatory/Supervision efforts were reduced
The author notes these five factors was "a deadly cocktail." We seem to have drunk the same heady and dangerous brew here in the US. I call it a Long Island Financial Iced Tea -- five liquors mixed with reckless abandon, invariably producing a pounding hangover.
I suspect where there will be significant differences in the manner of how the two crisises will be resolved. The Norwegian crisis resolution contained five features:
Norwegian Hangover Cure
• Private solutions were explored before the government intervened.
• Share capital was written down to zero before committing public funds.
• The government acted swiftly to limit contagion, but did not provide a blanket guarantee.
• Liquidity support was given to illiquid, but solvent institutions.
• The government did not use an asset management company.
This is a rather intriguing guide to resolving the current sub-prime debacle. Note that the Norwegians avoided any moral hazard, refused to bail out speculators. It will be interesting to see if the US can follow a similar path -- especially with the monoline insurers. Will share capital be written down to zero before committing public funds in firms such as Ambac (ABK), MBIA, FGIC ?
The alternative leads us to a situation where grossly speculative profits remain private, but systemic risk is public. This would be a wholly unsatisfactory conclusion.
>
Source:
A Norwegian perspective on banking crisis resolution
Kristin Gulbransen
Norges Bank, 16 June 2005
Conference on Banking Crisis Resolution - Theory and Policy, Oslo
http://www.norges-bank.no/Pages/Article____13822.aspx
Sunday, February 10, 2008 | 07:33 AM | Permalink
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Comments
Way too wonky for a Sunday morning, no?
Posted by: Barry Ritholtz | Feb 10, 2008 8:23:08 AM
What is meant by "share capital"?
Posted by: Quiddity | Feb 10, 2008 8:56:23 AM
"The alternative leads us to a situation where grossly speculative profits remain private, but systemic risk is public. This would be a wholly unsatisfactory conclusion."
AMEN!
Posted by: EDF | Feb 10, 2008 8:58:40 AM
Obviously the Norwegians lack our effective lobbying system and Wall Street (GS) to Washington career path. In short, the average American is screwed. But not to worry, our "elected" politicians will put a lovely spin on it all.
Posted by: lurker | Feb 10, 2008 8:59:46 AM
The Vikings got it right.
The problem will be how we determine who is solvent. Liquidity can sometimes mask who is truely broke. Citi comes to mind circa 1990.
Another solution would be to nationalize the insolvent, write down the share capital to zero, re-capitalize the institution and re-float the shares to the public. I do-over.
The equity and junior debt holders are the bag men. Using public money up front and recouping at a later time might work.
Call it a Pavlovian solution. Bad management, bad equity holders........no biscuit.
Posted by: Ross | Feb 10, 2008 9:16:18 AM
I am new to this site, also just five years studying the markets, and completely new to having interests in politics. This time I need to know as much as possible, so I'm asking...
Does Ron Paul's monitary policies make sense?
I like what I hear from Ron, but, can I ask that on this site? How to you feel?
Posted by: Ken | Feb 10, 2008 9:42:31 AM
Time to return the compliment ... this is one of your best posts in a long time. Rather than shouting that the sky is falling, you presented problem, an explanation that didn't rely on 'what everybody knows', and a solution.
Where can I find references on the non-Japanese macroeconomic problems?
Posted by: cinefoz | Feb 10, 2008 9:49:37 AM
Maybe it's unneccesary to say, but the Norwegian Financial Crisis of 87 produced alot of personal economic ruin among normal people. Solely because of declining housing market coupled with rising uneployment.
In Norway it is not possible to 'Walk Away' from debt. Norwegians ending up with foreclosure have to pay back all of the original loan, with interests, regardless of how much the house sold for.
The common opinion among the Norwegians is therefore that the banks were let of easily, while private people with houses were the big loosers. The fact that the government also took away some of the tax-reduction for interest on mortgages as part of the crisis management made matters worse.
'Walking Away' in the American housing market is going to have unexpected and severe consequences for someone. If the individual home owners are not taking the bills, who are?
Posted by: Bram | Feb 10, 2008 9:53:15 AM
Meanwhile, back at the ranch....
The solution in the U.S. will be determined by which party wins the elections.
If the Republicans win, the bailout will be to ensure businesses have the financing they need to provide good jobs.
If the Democrats win, the bailout will be to protect the children.
If Ron Paul wins, he'll be sent to Norway.
Posted by: Winston Munn | Feb 10, 2008 10:08:43 AM
Thanks to you for the summary, and to your reader who provided the link.
The author of the linked content took a complex event and made it easy for a layman to understand, and then you refined it even more.
Posted by: Groty | Feb 10, 2008 10:32:54 AM
Luckily this is the US and not Norway or Finland or Spain or Japan or Sweden. There's no comparison here. The US will be fine.
Posted by: usausausa | Feb 10, 2008 11:11:05 AM
Great post BR.
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/02/10/ccjapan110.xml
Posted by: Stuart | Feb 10, 2008 11:19:17 AM
"Does Ron Paul's monitary policies make sense?
I like what I hear from Ron, but, can I ask that on this site? How to you feel?"
If you think the Government should stop all social programs and remove the saftey net. And if you believe in regressive taxes that fall hardest on the poor. Then Ron Paul's economic policies make sense.
Posted by: edhopper | Feb 10, 2008 12:38:27 PM
Good post. Quickly checking the current relative numbers
comparing the US and Norway via the CIA factbook, I see
the following.
Norway
GDP* - $284 billion (2007 est.)
GDP (growth rate) - 4.9% (2007 est.)
GDP per capita - $55,600 (2007 est.)
Unemployment Rate - 2.4% (2007 est.)
Budget
revenues: $232.3 billion
expenditures: $158.4 billion (2007 est.)
Public Debt - 39.1% of GDP (2007 est.)
US
GDP* - $13.75 trillion (2007 est.)
GDP (growth rate) - 2.2% (2007 est.)
GDP per capita - $46,000 (2007 est.)
Unemployment Rate - 4.6% (2007 est.)
Budget
revenues: $2.568 trillion
expenditures: $2.731 trillion (2007 est.)
Public Debt - 39.1% of GDP (2007 est.)
GDP - official exchange rate
Norway appears to have the advantage. Seems like
this a template worth following.
Note: I'm not sure how well these numbers can be trusted.
The factbook stated public debt for the US is 39.1% or
$5.3 Trillion. I thought our debt was over $9 trillion.
Posted by: Mark Hessel | Feb 10, 2008 12:48:05 PM
"The alternative leads us to a situation where grossly speculative profits remain private, but systemic risk is public."
Aren't we already there? Annualized Tbill rates over the last 5 years = CPI. After tax most folks are losing the purchasing power of their savings. Meanwhile all those who rely on cheap financing get wealthier. We might as well institute a tax on bank accounts. The proceeds could then be given to hedge funds and homeowners - the effect would be the same.
Posted by: Kolya | Feb 10, 2008 12:49:46 PM
These numbers do indicate that
Norway is taxing the hell out
of there citizens.
GDP - 284 billion
revenue - 232.3 billion
Not sure if I can trust the CIA.
Thanks for the Japan bank post Stuart.
Posted by: Mark Hessel | Feb 10, 2008 1:11:08 PM
"The alternative leads us to a situation where grossly speculative profits remain private, but systemic risk is public. This would be a wholly unsatisfactory conclusion."
"Aren't we already there?"
"Obviously the Norwegians lack our effective lobbying system and Wall Street (GS) to Washington career path."
And so the number one topic of discussion among the elite right now is not so much "should we do it?" but "can we get away with it again this time?".
Posted by: Al Czervik | Feb 10, 2008 1:50:42 PM
It amazes me that we keep chasing our tail with no hope of ever catching up.
Interest-rate manipulation is nothing more than time alteration. Artificially low rates and easy debt access simply compresses the time of normal economic actions - by attracting future buyers to act earlier, there is no real economic growth but only future growth borrowed.
When the time arrives to repay the borrowed growth, we ask the central bankers to fix the problem with the same solution that was its cause.
And round and round we go.
I am reminded of the solution found by the computer in the movie WarGames: "The only winning move is not to play."
Posted by: Winston Munn | Feb 10, 2008 1:51:35 PM
Just imagine if Norway didn't have gobs of $91.00 oil to export.
Posted by: Street Creds | Feb 10, 2008 2:07:33 PM
A good overview of Norway's petroleum based economy and socialist type leanings along with reviews of other petro-economies is below:
http://slate.msn.com/id/2108873/
From Slate Magazine:
Norway has pursued a classically Scandinavian solution. It has viewed oil revenues as a temporary, collectively owned windfall that, instead of spurring consumption today, can be used to insulate the country from the storms of the global economy and provide a thick, goose-down cushion for the distant day when the oil wells run dry.
Less than 20 years after they started producing oil, the Norwegians realized their geological good luck would only be temporary. In 1990, the nation's parliament set up the Petroleum Fund of Norway to function as a fiscal shock absorber. Run under the auspices of the country's central bank, the fund, like the Alaska Fund, converts petrodollars into stocks and bonds. But instead of paying dividends, it uses revenues and appreciation to ensure the equitable distribution of wealth across generations.
Here's how it works. Cash flow from the government's petroleum activities—the state owns 81 percent of the aptly named Statoil—is funneled into the fund. Last year, the total came to 91.9 billion kroner (about $14 billion). The fund then hires external managers to invest, generally using low-cost indexing strategies. It's conservatively managed—more bonds than stocks, and investments divided equally between Europe and the rest of the world. (Here are the results of six years of active management.)
Of course, the fund's history reveals some of the pitfalls of having socialists manage oodles of cash. The fund didn't start to invest in stocks until 1998, thus missing out on a big chunk of the boom. In 2001, it started a sub-fund to make eco-friendly investments—good social policy, dubious asset-management strategy.
But the huge balances mean Norway can happily continue to be heavily socialist without confronting the problems that its Euro-neighbors to the south face—unemployment, high inflation, and huge national debts. Yes, fiscal budget expenditures were a whopping 38.3 percent of gross domestic product in Norway last year. But the country still runs a budget surplus. Last year, per-capita GDP was a healthy $51,755, and both unemployment and inflation are low.
In Norway, the sudden increase in oil prices has meant larger inflows to the fund and enhanced long-term welfare for its citizens. That's not how it goes down in other big oil producing countries. In Russia, the oil boom has enriched oligarchs and increased foreign currency reserves. But the quality of life in Russia continues to deteriorate. Saudi Arabia has been pumping far more oil than Norway and for a far longer time. But its oil revenues tend to flow into the bank accounts of the royal family—not into a segregated account to benefit the public at large. As a result, the richest oil nation on earth still resembles a garden-variety poor country: a 25 percent unemployment rate, tremendous inequality of wealth and assets, a massive public debt, and an undiversified economy dependent on commodity exports.
Posted by: kk | Feb 10, 2008 2:07:56 PM
Mark,
the OECD statistics say that public revenue in Norway 2005 was around 45% of GDP. So that CIA number definitely makes no sense.
Unless - perhaps - they´re counting Norway´s oil income in some way? I seem to remember that Norway got a state owned fund where part of the oil profits get invested for the future. With the high oil prices in the last few years, that might account for the difference in numbers?
And your question about "public debt for the US is 39.1% or $5.3 Trillion". I seem to remember that there is a difference between "public debt" ($5.3 trillion) and "all federal debt" ($9+ trillion). If I´m right, public debt for example doesn´t include federal debts owned to other federal departments.
As in Social Security.
The trustee report for 2006 says that Social Security and Disability Insurance had around $2 trillion "invested in interest-bearing securities of the U.S. Government".
Not owned by "the public" and not traded/auctioned to the public.
Posted by: Detlef | Feb 10, 2008 2:18:36 PM
"If you think the Government should stop all social programs and remove the saftey net. And if you believe in regressive taxes that fall hardest on the poor. Then Ron Paul's economic policies make sense."
You sir, obviously haven't spent much time, if any looking at Paul's positions.
Please tell me what is less regressive than NO income tax.
If you believe that an individual should be FORCED to spend his time and labor (welfare comes from taxes which comes from MY labor) to provide for someone else, then he makes no sense.
I personally believe in the freedom of the individual, if he wants to take all his money and blow it on drugs, or big TVs so be it, if he wants to voluntarily give it to charity, good for him.
No one individual should be FORCED to subsidize someone else's living-that's a form of slavery.
Posted by: Shane | Feb 10, 2008 2:22:52 PM
Beautiful fjords!
Lovely little crinkly bits....
Posted by: donna | Feb 10, 2008 2:48:46 PM
Our government has already begun to bail out speculators. We would have had our banking crisis last August had the Federal Home Loan Banks not loaned many billions to the mortgage banks, 50+ billion to CFC alone. The taxpayers will eat these losses and many more. I am beginning to believe that our brain-dead government will readily destroy the dollar and our savings in a vain attempt to shore up our deeply corrupt and insolvent financial institutions.
Posted by: Citizen Bagholder | Feb 10, 2008 3:44:44 PM
Ken,
You might be better off reading a standard intro economics text on the issues of the gold standard v. fiat money. This would be wiser than trusting the opinions of a random set of blog posters, even ones as discerning and knowledgeable (I say modestly) as the readers of the Beeg Peekture.
The quick answer is that all the big, successful economies use fiat money and a managed money supply and there's general agreement that it works, assuming honesty and competence on the part of the authorities and big banks. An analogy would be commercial aviation, which we accept despite obvious dangers and costs. We don't expect to learn that the radar operators are having a mass Long Island Iced Tea party while all the control towers have been taken over by squads of a death cult. Not that this comparison has anything to do with the financial markets, of course.
Posted by: Roger Bigod | Feb 10, 2008 3:51:34 PM
