In July this year the Swedish National bank (Riksbanken) cut its key interest rate by two thirds, to reach the European norm 0.25 percent. The head of the bank – Stefan Ingves – had struggled to keep the rate high in his attempts to suppress the swelling bubble of private debt. He seemed to be one of the few economists in Sweden who really worried about that bubble. Itâ€™s just that he was accompanied by OECD, EU, the World Bank and other expert bodies who all have expressed serious concern and had given Sweden grave warnings. Finally Ingves had to give in to the majority of the board, who think that the debt problem should be dealt with by other means and by the government (which probably is correct since Ingvesâ€™ policy hasn’t prevented the bubble from growing pathologically).
As we have written earlier on this issue the amount of housing loans in Sweden have literally exploded during the last ten years, from 0.7 trillion SEK to 2.7 trillion, i.e. by 400 percent (1 USD = 6.8 SEK), and are still expanding. This increase is of course not even distantly founded on real economic factors. It has mostly been enabled by the banks emitting fictitious money. One important observation, never mentioned by economists, is that part of that imaginary money certainly has trickled into the economy and created a demand without much foundation in reality. We have hence lived beyond our means and the day of payment lies ahead, perhaps in the near future.
This trickle effect also puts some perspective on our Finance ministerâ€™s bragging about the Swedish economy, which apparently escaped the 2008 crisis better than many other countriesâ€™. It may have been a giant Keynesian experiment, except that the liabilities are private and has to be paid in real life by living creatures (not by state economies that can dribble with debts in different ways).
In the last statistics the debt increase had accelerated compared to the previous year. With the lowered rates now taking effect we can expect further aggressive uttering of loans by the banks. The other day I even had a letter from our large cooperative organization â€“ Coop â€“ trying to persuade me to accept a loan for a quarter of a million SEK, without any specific security. Everyone is eager to make some easy profits as long as it works. And when it doesnâ€™t work anymore the banks rest assured that the taxpayers will save their stock holders from any losses. The same tax payers that will end up with a personal debt for lifetime if they aren’t among the least vulnerable.
Since politicians and economists can’t claim to be totally deaf and blind there has been some minor debate onÂ the debt problem. But just shallow and scarce discussions, with the only exception of some miniscule measures guaranteed not to provide any real effects whatsoever. The present bourgeoisie government is expected to lose next monthâ€™s elections with a large margin, and it seems as if they willingly are handing over the problem to the Social Democrats.
In this rare debate one economist actually was admitted an op-ed in our main paper DN, one weeks ago. He dealt on some of the measures discussed, and strongly advised against one of them. We are in this country endowed with a tax reduction amounting to 30 percent of interest payments on all kinds of loans. One of the measures discussed is to repeal this right to reduction, an operation our economist strongly opposed. His argument was that such an action probably would trigger the avalanche and create the crisis it was intended to prevent.
Another aspect discussed is the norm for amortizing house loans. Those norms are extremely liberal here compared with most other countries. Since three decades house owners have de facto been relieved from paying any part of their loans whatsoever. Some demand for minor net repayments are now in place. Our economistâ€™s argument generalizes to this measure, and to all others that has a substantive effect. A demand for repayment that really would impede increasing loans has to be of a magnitude that would tip too many house owners off the cliff and thus make the bubble burst.
Itâ€™s almost a law of nature that financial bubbles canâ€™t be deflated in a controlled way. There is no smooth landing for a rocket. Thatâ€™s probably one reason why our most distinguished economists are silent about the loan crisis. At best they are relying on the perfect market hypothesis, but probably they just prepare to keep hiding when the crash comes. Our politicians will probably put their heads in a bag and blame some previous government and the other parties.
Autumn and election years constitute a fruitful environment for financial crisis, both coming up soon in Sweden. Right now everything seems calm and under control, but that is also a precursor as good as any for dramatic events on the economic arena. I wouldn’t be surprised if the loan bubble here would burst any time soon, and if I had a house to sell I would already had done it.