15. CHANGING THE GUARD

Too much of a muchness?

Ordinary Swedish citizens remember the summer of ’94 not because of anything connected with John Nash, much less game theory, but because Sweden remained mired in its deepest recession since the Thirties. How could it be? A little bit of a recap could be useful before we come to the point.

Some readers may remember the One Percent Coup of the Fifties, when arguments about monetary policy spilled onto the front pages for the first time since the end of WWII. Sweden was familiarizing itself with the new Bretton Woods agreement. A currency crisis threatened. To defend the krona, Sweden’s dollar, Riksbank Governor Per Åsbrink raised interest rates a full one percent without telling the government ahead of time.

The One Percent Coup was the beginning things: modern Swedish finance, its independent central banking, and the Nobel prize in economics, among them. The results. But it ushered in an era of intense banking supervision by the Social Democrat, such that commercial bankers complained that they were little more than civil servants, making only loans preferred by the government. The regulatory system lasted until the Eighties when a coalition government undertook deregulation of the financial industry, the measure that economists and bankers had pressed for all along.

Deregulation produced a five-year boom, followed by a lengthy bust. An inexperienced conservative government was slow to counter it, and the bust got worse. To halt a banking panic, the Parliament proclaimed deposit insurance for all the nation’s banks. How to pay for the bailout? It took only five days for a handful of economists, who had known each other since graduate school, to design a politically acceptable plan that succeeded. When the United States tried to do the same thing in 2008, it took five weeks and immeasurably more money. As in 1934, Sweden had come out “a little ahead of the rest.” Still, unemployment reached 14 percent.

Civilians blamed the economists. A number of Academy members blamed themselves. They decided to do something about it.