For the banking system, that is . . .

Writing in yesterday’s FT, equity strategist (and noted gloomster) Christopher Wood makes a convincing case:

A crucial principle of the Swedish model is that banks were forced to write down their assets to market and take the hit to their equity before the recapitalisation began. This is of course precisely what has not happened in either the US or Britain, where too many policy measures seek to delay asset price clearing and only add public sector debt on top of existing private sector debt….The ultimate endgame in countries such as the US and Britain is still likely to be full-scale nationalisation of most of the banking system, as the logic of such action finally becomes overwhelming. But it would be much better if this were done proactively rather than reactively, since it would accelerate resolution of the financial crisis. This is why nationalising the banks would also be bullish for stock markets, if not for the specific bank stocks themselves – although, obviously, there are powerful vested interests wanting to prevent such an ultimate course of action.
Another point about nationalisation, as in the Swedish model, is that it allows the government to separate the bad assets from banks’ balance sheets and place them in one big “bad bank”. This should enable whatever is left of the smaller “good” bank, which should be managed by old-fashioned commercial bankers, to become a viable private sector operator again more quickly. Another more technical, albeit important, point is that, given that many of the bad assets in this cycle will be derivative- related in some form or other, where two nationalised banks have been counterparties to the same transaction the derivative deal could be in effect terminated or cancelled because the government would be the owner of both entities. In this respect the limited number of counterparties in the $55,000bn* credit default swap market could suddenly become a positive and not, as now, a systemic negative.
It is true the Swedish model is not a pain-free panacea. It would just mean the beginning of an orderly workout. Unfortunately, the deflationary pain is inevitable because of the scale of the credit boom of recent years, the excesses of which were ignored for so long by the relevant central bankers.