Central Banker Hero Becomes Face of Failure in Swedish Tale

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Stefan Ingves
Stefan Ingves, governor of Sweden's central bank. Photographer: Simon Dawson/Bloomberg

Stefan Ingves, the governor of Sweden’s central bank, was held up as an example of how to expand the monetary tool box just three years ago.

Back then he was fighting asset bubbles that economists including Nobel Laureate Robert Shiller warned were coming. Now, Ingves’s name is associated with a failure to prevent deflation through policies dubbed “sadomonetarist” by another Nobel Prize winner, Paul Krugman.

Through it all, one man has been warning that this is exactly how things would turn out. Lars E. O. Svensson, an old Princeton University colleague of Krugman’s and former Federal Reserve Chairman Ben Bernanke, says Ingves is personally responsible for the deflationary slope Sweden is now sliding down. Svensson stepped down from the Riksbank’s six-person board last year in protest at its policies.

“The Riksbank’s monetary policy has simply failed,” he said in a phone interview. “This situation is completely self-inflicted and it’s really Stefan Ingves that bears the greatest responsibility.”

In a New York Times blog post on Oct. 28, Krugman said the Riksbank’s policies during the global economic crisis were based on “gut feelings and sadomonetarist cliches.” He faults the bank for ignoring Svensson’s pleas for lower rates.

The entreaties were echoed by a growing chorus of economists, politicians and business leaders arguing Sweden’s monetary policy was hurting the largest Nordic economy.

Record Cut

This week, Ingves responded to Sweden’s economic plight by cutting rates to zero for the first time in the bank’s history. He now sees the repo rate staying there until the middle of 2016, by which time the bank estimates inflation will be back at its 2 percent target. Price growth hasn’t reached that pace for almost three years. This year, prices have declined in seven of the nine months measured.

The rate cut was bigger than most economists had predicted -- the median estimate in a Bloomberg survey of 17 analysts was for a cut to 0.1 percent from 0.25 percent. The move drove the krona down as much as 1.3 percent against the euro on Oct. 28, the day of the announcement. Ingves says he’s now delivered what’s needed to tackle deflation and isn’t planning to do more.

“It feels like he’s been more or less forced” to cut to zero, Michael Grahn, an analyst at Danske Bank A/S in Stockholm, said by phone. “He really would have preferred not to do this. He’s not one of the people standing on the barricades arguing that low inflation is a big problem. He’s rather standing on the other side and saying household debt is a problem.”

According to Krugman, the rate cut has come too late.

Irreversible Damage

“The damage may be irreversible,” he said in his blog.

Headline consumer prices dropped 0.4 percent in September from a year earlier. Unemployment was 7.2 percent last month, Scandinavia’s highest rate and more than double the level of neighboring Norway. Still, the $510 billion economy is set to grow 2.8 percent this year, more than double the 1.2 percent in the euro area, the European Commission said in May.

Ingves, a 61-year-old who has been Riksbank chief since 2006 and also chairs the Basel Committee on Banking Supervision, has described his approach as “leaning against the wind.” He was re-elected to sit a second term from 2012 that is due to run six years.

The Hero

Ingves says the Riksbank has done as well as it could under the circumstances. His reluctance to deliver deeper cuts earlier was partly based on Swedes’ record-high debt burdens -- more than 170 percent of disposable incomes -- which he says monetary policy shouldn’t inflate further.

“We’ve conducted the monetary policy that we’ve considered to be the most appropriate on each occasion,” he said Oct. 28. “Then for various reasons, the general economic development, not least inflation, has been somewhat different from what we imagined, and then we have reacted to that and dealt with that.”

Before becoming governor of Sweden’s central bank in 2006, Ingves was head of the International Monetary Fund’s monetary and financial systems department. His claim to fame then was as one of the key architects behind Sweden’s recovery from its 1990s banking crisis. Back then, excessive credit growth was part of the problem that drove a real estate boom and triggered a subsequent bust.

Defending Ingves

Not everyone blames Ingves for Sweden’s failure to avoid deflation. In 2011, when he was being feted as a visionary who was adapting policy to the new post-crisis world, Sweden was outgrowing much of Europe. In 2010, Sweden’s economy grew 6 percent, more than twice the pace in the euro area and the U.S.

“It’s good that there are people who take pretty big and broad responsibility for society and there are not that many of them,” said Annika Winsth, chief economist at Nordea Bank AB, Scandinavia’s biggest lender.

Ingves has the “integrity” to stick to his beliefs, she said. “He’s incredibly competent when it comes to financial stability.”

His mistakes aren’t due to any “sadomonetarism,” said Peter Doyle, the former IMF mission chief to Sweden who’s now writing a book on lessons from the Swedish and U.K. economies.

“My argument is that, no, they weren’t targeting inflation below target, they had misread the external environment,” he said in an interview. “That’s what they got wrong. Even from 2011 onwards I think that the Krugman criticism is mistaken.”

Debt Backlash

Ingves’s concern that excessive easing might fuel consumer debt growth may have focused on the wrong evil, according to Par Magnusson, chief economist at Royal Bank of Scotland Group Plc in Stockholm. With consumer prices declining, real household debt burdens are growing.

Magnusson says Ingves’s decision in July to vote for a smaller cut than the 0.5 percentage point his board pushed through was revealing.

“He once again chose to emphasize that I don’t want to cut so much since I think it could lead to debts rising,” he said. “That suggests that he still hasn’t bought the argument that it’s inflation that’s the most important way to fight debt.”

Svensson, now a professor at Stockholm University, says central bankers everywhere need to ensure they understand what really happened.

“Normally the victors re-write the history books but here one can say that it’s the losers that are trying to re-write the history and to make excuses for their earlier policy,” he said. Ingves “doesn’t seem very interested in monetary policy and he doesn’t seem to understand how monetary policy and the rate affects the macro economy and how it affects household debt.”

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