In 1992, Sweden encountered a banking and financial crisis that was surprisingly similar in origin and impact to that which the U.S. – and now the global – economies are confronting. The Swedish banks had expanded far too rapidly, primarily into commercial real estate, in an era of easy money, deregulation, and declining credit standards. Private sector debt increased to 135% of gross domestic product (GDP) within five years. Real estate values rose dramatically and then abruptly declined. All the usual consequences rapidly emerged. At the point of financial collapse and insolvency, Swedish bank portfolios were gorged with relatively worthless real estate loans – among other bad debts.

What to do? Turn to government intervention or let the market take its toll and cleanse the system of inefficiency and stupidity?

As a largely socialist country, the initial decision was simple. The government would indeed intervene by mounting a massive bail-out that approximated four percent of its GDP. (By comparison, the present U.S. bail-out package of $700 billion is roughly five percent of our GDP.) But it did so under two stringent conditions. First, the banks had to publicly reveal the status of their portfolios, which were evaluated and assessed by the government, and then immediately write-down the value of impaired assets. The write-downs frequently obliterated shareholder value and threw institutions into virtual insolvency. At that point, the government stepped in to recapitalize banks that required assistance but did so by requiring equity positions that were commensurate with the size of the bail-out. As banks returned to profitability and solvency, the government sold its equity position in the process of re-privatizing the banks.

Interestingly, the Swedish government toyed with a more gradual approach in which it would allow banks to delay revealing the magnitude of their portfolio problems in the hope that intervening events would somehow fix or alleviate the mess. But it decided against the gradual approach in the interest of immediate clarity, which it assumed would more quickly re-establish confidence in the banking system. In hindsight, it made the right decision. The intervention worked well and effectively. The net loss to the Swedish taxpayer was roughly half the amount originally committed by the Swedish government to the bail-out.

Is there a lesson here for the U.S.? Do the U.S. and global economies gain or lose by the absence of knowledge and transparency about U.S. financial institutions? Is the crisis prolonged or shortened by continuing obscurity? Common sense suggests that transparency would work as well in the U.S. as it did and does in Sweden.