The Lure Of ‘Ikea Economics’

If We Just Keep Tinkering, Something May Eventually Work …

Bloomberg has published an interesting article that will either make you laugh out loud or make you tear out your hair with frustration. It is entitled “Ikea Economics Lure Central Bankers Seeking New Tools”. 

The reference to Ikea is explained in the introductory paragraph:

“If you’ve ever bought a folding futon bed from Ikea you’ll probably have been both impressed and perplexed by Scandinavian ingenuity.

It’s the same when it comes to central banking. Policy makers are looking to Sweden,Norway and Denmark for off-the-shelf measures they can build at home.”

These ‘off-the-shelf’ Scandinavian measures consist mainly of the imposition of negative interest rates, which have been ‘tried out’ in Denmark and Sweden. Why the practices of these countries should serve as an example worth emulating is a bit mysterious, considering that they are home to some of the most egregious real estate bubbles  and concomitant household credit bubbles the world has ever seen (we have previously discussed the situation in Denmark, Sweden and Norway in some detail).

The article continues:

“Sweden invented the central bank, establishing the Riksbank in 1668 after the public lost confidence in the paper money produced by Stockholms Banco. Bank-rescue strategies in the 1990s and efforts to improve central-bank communications through forward guidance taught lessons to first responders in the recent global financial crisis.

Now, the European Central Bank is considering copying Sweden and Denmark by charging banks to hold their money. And the Bank of England may mimic steps taken by Sweden and Norway to tame a housing boom.”

The Bank of Stockholm (which was the forerunner of the Riksbank) was founded in 1656, and initially adhered to a 100 percent reserve in its deposit banking operation (the bank had two separate divisions for deposit and loan banking). However, it soon began with the practice of issuing bank notes well in excess of its reserves. As a result of the bank engaging in fraudulent fractional reserve banking, its depositors were left with worthless slips of paper. It took only 12 years from the bank’s founding to its bankruptcy. After it had been nationalized by the government in 1668, the fraud was simply continued under a new name and under the direction of the government.