Since I am from Sweden while most of my readers aren't, and since the bail-out of Swedish banks by the Swedish government in many American media reports have been said to be essentially the same as the bail-out propsed by Hank Paulson, and since this bail-out in these same media allegedly was a big success, I have recently received questions about it.The truth is that first of all that the Swedish solution was much better than the plan proposed by Paulson or for that matter the Democrats. And secondly, while the plan was better than the ones proposed in Washington, it wasn't as big of a success as it is often asserted.The background to the Swedish banking crisis was a ill-timed "deregulation" in 1985, where Swedish commercial banks were permitted to lend as much as they wanted in a time where the tax system and the high rate of inflation meant that after-tax real interest rates were significantly below zero. That of course meant a massive credit and monetary expansion during the latter half of the 1980s. As Sweden at the time also had a fixed exchange rate, this meant that the real exchange rate rose sharply and soon became highly overvalued. As the overvaluation and the recession in important trading partners such as the U.S. and the U.K. caused net exports to decline, the Swedish economy began to weaken considerably in 1990. Meanwhile, Swedish politicians instituted a tax reform which closed several loopholes and broadened the tax base, while at the same time significantly reducing marginal tax rates. That reform was a very sound one in a long term perspective, but as the reduced tax rates also meant that the ability to deduct interest expenses fell sharply, this caused real interest rates to sky rocket. The weaker economy meanwhile caused inflation to fall while nominal interest rates had to be raised to defend the fixed exchange rates, contributing even more to a real interest rate shock.The end result of this was a deep economic downturn, which caused hugh losses for the banks in Sweden. Fearful that many banks would collapse and that this would cause a general run on the banking system, the Swedish government decided to declare that they would guarantee all depositors that they would get any money they deposited in a bank back. However, they made it very clear that they would not bail out those who owned shares in Swedish banks. Share holders in any bank which went bankrupt or turned to help from the government would see all of their equity wiped out and all operations overtaken by the government.These harsh terms made the banks extremely reluctant to seek aid, so most banks did everything they could to avoid it. In the end, apart from a smaller regional savings bank, only Gota bank was taken over. Moreover Nordbanken (now known as Nordea), which was largely state-owned to begin with was fully nationalized. The other large banks, S-E-Banken (now known as simply SEB) and Handelsbanken, as well as the main savings bank called Sparbanken (what is now known as Swedbank) was not bailed out. S-E-Banken was close to collapsing, but the main owner, the Wallenberg family, chose to recapitalize the bank themselves rather than turning it over to the government.The Swedish solution thus limited the bail-out to depositors while destroying the equity of any bank whose depositors had to be bailed out. By contrast, the Republican bail-out plan would fully bail out share holders as well, and the Democratic bail-out plan would partially bail them out.Was this limited bail-out a success then? Well, it probably limited the severe downturn in the economy somewhat, but at the initial cost for taxpayers of 4% of GDP (which in today's America would be equivalent to more than $550 billion). Admittedly, some of those costs weren't really costs in a proper accounting sense, since the government was able to recoup some of the spending it made by later profits these state owned banks made. However, it is certainly not the case that nearly all of the spending has been recouped, as some of the calculations that have been made that seemingly conclude this overlook that much of Nordbanken was already state owned and also assume a too low opportunity cost for the money. On the minus side must also be added that the limited bail-out created a moral hazard that has contributed to current problems in the Swedish economy.The economic recovery that followed could hardly be attributed to the bank bail-out as it first of all was exaggerated by the terms of trade factor, and secondly can be attributed to long term effects the free market economic reforms implemented in the late 1980s and early 1990s (including the aforementioned marginal tax rate cuts) as well as the end of the overvalued exchange rate and the extremely high real interest rates used in a vain attempt to defend that overvalued exchange rate.