Effective practices in crisis resolution and the case of Sweden

The current credit-market tumult reminds people that the developed world is still acutely susceptible to financial crises. Researchers have identified a number of practices that seem successful at stopping the financial bleeding brought on by a crisis while also preventing similar excesses from reemerging in the future. This article describes these crisis resolution practices and discuss the way in which Sweden applied them in the early 1990s. The early 1990s crisis in Sweden followed a massive credit bubble largely characterized by speculative real estate ventures and booming consumer debt. With inflation creeping up and growth stagnating in the 1980s, Swedish policymakers gave a boost to economic growth by loosening lending restrictions on banks and devaluing the country's currency, the krona, which was kept at a fixed exchange rate. Domestic banks used their new-found power to pump credit into a system with pent-up demand. Foreign investors were happy to channel their money to this underserved credit market. The economy boomed on funds borrowed in foreign currencies.