Lessons From The Japanese

I don’t know who Hiroko Tabuchi is but he wrote one hell of an article for The New York Times. Inthe space of three pages he succinctly traces the history of the Japanese banking crisis and draws perfect parallels to our situation.

Listen to his recounting of the wages of inaction on the part of the government of Japan:

The Obama administration is committing huge sums of money to rescuing banks, but the veterans of Japan’s banking crisis have three words for the Americans: more money, faster.

The Japanese have been here before. They endured a “lost decade” of economic stagnation in the 1990s as their banks labored under crippling debt, and successive governments wasted trillions of yen on half-measures.

Only in 2003 did the government finally take the actions that helped lead to a recovery: forcing major banks to submit to merciless audits and declare bad debts; spending two trillion yen to effectively nationalize a major bank, wiping out its shareholders; and allowing weaker banks to fail.

By then, Tokyo’s main Nikkei stock index had lost almost three-quarters of its value. The country’s public debt had grown to exceed its gross domestic product, and deflation stalked the land. In the end, real estate prices fell for 15 consecutive years.

That pretty much puts into perspective the risks that we are running. Get it wrong and the cost is so great that it will haunt us for a generation or more. The next part of his article, though, goes directly to the heart of why the Japanese failed to act and resonates way too much for comfort.

“I think they know how big it is, but they don’t want to say how big it is. It’s so big they can’t acknowledge it,” said John H. Makin, an economist at the American Enterprise Institute, referring to administration officials. “The lesson from Japan in the 1990s was that they should have stepped up and nationalized the banks.”

Instead, the Japanese first tried many of the same remedies that the Bush administration tried and the Obama administration is trying — ultra-low interest rates, fiscal stimulus and ineffective cash infusions, among other things. The Japanese even tried to tap private capital to buy some of the bad assets from banks, as Mr. Geithner proposed.

One reason Japan’s leaders were so ineffectual for so long was their fear of stoking public outrage. With each act of the bailout, anger grew, making politicians more reluctant to force real reform, which only delayed the day of reckoning and increased the ultimate price tag. Japanese taxpayers are estimated to have recouped less than half what it cost the government to bail out the banks.

A further lesson from Japan is that the bank rescue will determine the fate of the wider economy. While President Obama has prioritized his stimulus plan, no stimulus is likely to succeed unless the banking sector is repaired.

Reflecting on the dismal performance of our elected representatives yesterday as they grilled the big bank chiefs it squares perfectly with the picture Mr. Tabuchi paints of the Japanese politicians. Ours, like theirs, know the dimensions of the problem and know full well that the measures they are proposing as a cure are not what is required. The proper prescription carries such political risk that it is a last resort. So they attack and invent memes that they hope resonate with their constituents rather than addressing the problem.

The next little bit of history may stun you.

Many in Japan thought that low interest rates and economic stimulus measures would help banks recover on their own. In late 1997, however, a string of bank failures set off a crippling credit crisis.

Prodded into action, the government injected 1.8 trillion yen into Japan’s main banks. But the injections — too small, poorly planned and based on little understanding of the extent of the banking sector’s woes — failed to stem the growing crisis.

Fearing more bad news if banks were forced to disclose their real losses, Japan’s leaders allowed banks to keep loans to “zombie” companies on their balance sheets.

Japan, instead, experimented with a series of funds, in part privately financed, to relieve banks of their bad assets.

The funds brought limited results at best, says Takeo Hoshi, economics professor at the University of California, San Diego. For one thing, the funds were too small to make an impact. The depository for bad loans had no orderly way to sell them off. And the purchases that did take place failed to recapitalize banks because the bad assets were priced so low.

So far, the Obama administration’s plan avoids the hardest decisions, like nationalizing banks, wiping out shareholders or allowing banks to collapse under the weight of their own bad debts. In the end, Japan had to do all those things.

It almost sounds like Geithner and company have lifted some strategies from the Japanese experience without learning anything about the failures of their strategies. I suppose we will know if we are truly proceeding down this path as more GM’s become our zombie companies. Look very closely for that telltale sign. If the government begins to prop up more industrial companies that the banks continue to carry on their balance sheets then you will know the direction we are headed.

Mr. Tabuchi concludes with the final act (at least it was the final act until now).

Called the Takenaka Plan after Heizo Takenaka, who headed the government’s financial reform efforts, the move finally brought the full extent of bad loans to light. Initially, banks lashed out at Mr. Takenaka. “The government can’t order bank management to do this and that,” Yoshifumi Nishikawa, president of the Sumitomo Mitsui Financial Group, complained to the press in October 2002. “It’s absolutely absurd.”

But Mr. Takenaka stood firm. His rallying cry, he said in an interview on Wednesday, was, “Don’t cover up. Don’t distort principles. Follow the rules.”

“I told the banks clearly, ‘I am in a position to supervise you,’ ” Mr. Takenaka said. “I told them I am not open to negotiation.”

It took three more years to finally get the majority of bad loans off the banks’ books. Resona Bank, which was found to have insufficient capital, was effectively nationalized.

From 1992 to 2005, Japanese banks wrote off about 96 trillion yen, or about 19 percent of the country’s annual G.D.P. But Mr. Takenaka’s toughness restored faith in the banks.

“That was a turning point in the banking crisis,” said Mr. Gomi of the Financial Services Agency, who worked with Mr. Takenaka on the audits.

Well, 20% of our GDP would account for about $2.8 trillion. Is that the direction that we are headed? It would appear to be.

Financial crises seem to be the hardest thing for governments to come to grips with. Why? I would offer a couple reasons. Certainly, the sheer size of the problem is one that they simply don’t want to take before their citizens. The shock involved would surely and properly result in many of them being put out of office. More to the point, I suspect that they don’t understand the nature of the problem or the requirements for a solution. They simply aren’t prepared or able to comprehend the intricacies. So they do what politicians tend to do. Play for time. Unfortunately, while that often works, it doesn’t seem to when it comes to banking crises.

So you can see the template of how and how not to deal with the crisis, now what direction do we take? 

more: entire article here

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