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$5 Trillion Needed to Stop Bank Crisis, Says Japanese Expert

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Ken Ohmae, former head of McKinsey’s Tokyo office (disclosure: I have a passing acquaintence with him and he was enormously well regarded in his day despite being a tireless self-promoter) says that the Paulson program is grossly inadequate and the magnitude of the US crisis is so large that a $5 trillion international facility is necessary.

The quid pro quo of any international program is that the US would be put on a short leash, probably not as severe as the one to which Indonesia and Thailand were subject to in the Asian crisis. But the US is not good at austerity and has never been in the position of not being in the driver’s seat, so this sort of initiative would no doubt be rejected until it is too late for it to have much impact.

From Bloomberg (hat tip reader Saboor):

Treasury Secretary Henry Paulson’s $700 billion plan to buy devalued assets from financial companies is “a joke” because it doesn’t go far enough to calm markets, said Kenichi Ohmae, president of Business Breakthrough Inc.

Ohmae, nicknamed “Mr. Strategy” during his 23 years as a McKinsey & Co. partner, called for a $5 trillion “international facility” to be made available to financial institutions. The system could be modeled on one used by Sweden during its banking crisis in the early 1990s, he said.

“This is a liquidity crisis,” Ohmae said at an investor forum hosted by CLSA Asia-Pacific Markets, the regional broking arm of Credit Agricole SA, in Hong Kong yesterday. “The liquidity has to be so big that people won’t get panicky.”…

Ohmae, 65, is the author of management books including “The Mind of The Strategist,” “The Borderless World” and “The End of the Nation State.” Business Breakthrough, founded in 1998, provides online management training.

One way of funding the $5 trillion facility would be through contributions from foreign exchange reserves in China, Japan, Taiwan, the Gulf states, the European Union and Russia, Ohmae said.

An international relief effort on that scale might be difficult to coordinate, said Robert Howe, founder of Hong Kong- based hedge fund manager Geomatrix (HK) Ltd., which oversees $32 million. “I doubt the practicality of getting international cooperation on something like this,” he said.

Ohmae compared the current financial crisis with Japan’s 15- year economic decline that began in 1989. Both started with a property bubble, which wiped out companies’ equity when it burst, and like in Japan, the current one could lead to escalating bankruptcies as banks worried about their own survival rein in lending, he said.

The financial-market upheaval may lead to slower growth in China and the reversal of the commodity boom as ship orders are canceled and steel supply dumped, said Ohmae. What Ohmae called Japan’s “Viagra” economy and Australia’s “dig and deliver” boom may also fizzle as China weakens, he said.

Against the backdrop of a potential global market panic, Paulson’s plan is insufficient, said Ohmae…..

“He wants to fix problems one by one as if he were still the chief executive officer of Goldman Sachs,” he said. “He has to take his CEO hat completely off and come up with a systemic solution as opposed to a one-by-one solution.”

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31 comments

  1. a

    Indeed, this is the first time that I’ve heard someone mention a number that I think would solve the problem of recapitalizing the banking system. I’d even say it may even be a bit on the high side, but better safe than sorry, as they say.

  2. Matthew Dubuque

    Matthew Dubuque

    Indeed, austerity for the United States, shock therapy by most other names, as I described earlier this week in my comparison of this crisis to earlier IMF hostage negotiations with scores of “democratic” nations I have witnessed over the years.

    The modus operandi is the same throughout. During his stint at the IMF, Rogoff was intimately familiar with this process; ultimatums to legislatures, selloffs of markets to terrify them into acting prematurely and a whole range of shortsighted demands made to the hostage nation.

    Those who wish to learn more on this process are encouraged to read “World on Fire: How Exporting Free Market Democracy Breeds Ethnic Hatred and Global Instability” by Amy Chua, chosen by the Thatcherite magazine “The Economist” as one of their books of the year. It is also highly recommended by Thomas Sowell at the radical conservative Hoover Instution, where Milton Friedman spent his final years.

    Here is the link:
    http://tinyurl.com/4qsyfv

    And of course there is Naomi Klein’s seminal work as well.

    Matt Dubuque
    mdubuque@yahoo.com

  3. Anonymous

    Oh man, haven’t heard of Kenichi Ohmae (pronounced ‘OH MY’) since the 1980s, when he was one of the enlightened voices during the US-Japan trade deficit tensions.

    Ohmae’s suggestion raises a good point. The US, like any member of the IMF, has the ability to borrow from it. But as we all know, there will be strings attached.

    Nevertheless, beggars can’t be choosers. And since two of the IMF’s biggest debtors — Brazil and Argentina — paid off their balances completely, the IMF finds itself hurting for income, and needs some new borrowers.

    The US and the IMF — a match made in heaven. Fraskly, I would have a lot more confidence in international supervision, than in the gang of thieves currently in charge. Time for a dose of humble pie for the planet’s only Third World Superpower.

  4. Richard Kline

    Ohmae’s number makes a deal of sense, if; if we do the Japanese strategy. We don’t want to go that way, do we, given the scratch-and-dent precedent?

    I costs far less capital (i.e. none) to take over insolvent firms, and much less to recapitalize them while backstoping distinct markets such as munis from public credit authorities than it would to buy the assets of failed and failing firms. Just consider that.

    “Takedown not Bailout!”

  5. Kujo

    Part 1 of a Two Part Bailout (should cost less then 5 trillion)

    Now that we are neck deep in what appears to be a Wall Street bailout (along with some overseas stuff and apparently whatever else the Treasury Secretary feels inclined to do), we need to take a hard look at the whole problem. I’ve heard situation described, more than once, as an upside down pyramid (the homeowner being the base of the pyramid). If this is the case it seems that just throwing money at the top of the pyramid could make the situation that much more unstable in the long run. Now, I agree something needs to be done now for the short term confidence of the markets, most importantly the money markets. The root of the problem, however, the value of the underlying real assets will continue to deteriorate. Until this is dealt with somehow, any paper the Treasury buys will continue lose value. We are too close to the election to get anything serious done, but the conversation about some sort of new HOLC needs to begin soon. In my mind, this is the only thing that may ultimately work. The government will then start controlling some real assets (which in theory they ‘rent’ back to the original homeowners) and add some stability back to the housing market At the same time the ‘paper’ they own from the first part of the bailout will actually have some upside. Then we tackle building a new energy economy and create the jobs we will need to pull this off.
    Kujo

  6. Dean

    I have said $3 Trillion, but $5T sounds more prudent.

    Cramer is giving a “mad” explanation as we speak that MOAB will stop foreclosures.

    Kujo, how much to create a new energy economy and what are the sources of funds? These are good ideas but we are running out of money unless you are willing to absorb inflation galore.

  7. Anonymous

    sigh. no Bush/Republican administration is going to take “forrin” money, especially with strings attached. And when has the Decider listened to anyone with firsthand experience about a particular situation?

    We’re going to print our way out of this, but don’t worry it’s all cool cuz Jesus Christ takes care of everything, even monetary policy.

  8. doc holiday

    $5 T is closer as an estimate of truth today, versus the tried and true previous strategies of misleading and falsified PR used in tempting people with lowball values for Iraq War costs. I find no difference between Paulson now & Rumsfeld then in their vigorous attempts to mis-mange truth! The illusions at this stage should be somewhat more transparent — as America is handed over to Goldman and Friends Of Angelo, in what amounts to a cross between a televised circus and a slow motion train wreck!

  9. Lewis B. Sckolnick

    If 5.000.000.000.000 is so nice than why not have an investment bailout where the private sector purchases stakes. I think Ohmae San would agree here.

  10. Mara

    Ahem, may I point out that Jesus threw the moneylenders out of the temple? We should be so lucky. However, I do not trust the jeezus-freaks to lead us to the local McDonald’s, let alone honestly address the level of criminal greed that has run wild. Their solutions have boiled down to “drill and kill”, meaning drill for local oil and to go abroad and kill other folks for theirs. And if they don’t have oil, force them into buying dollars to prop up charade a little while longer.

    That said, I had heard the $3-5T number from friends in Japan earlier this year. Of course, they’ve already been down this road, but they were better prepared. We need the help from others because we are being financially held hostage. I’m not thrilled about the IMF, but this has to be handled by someone who’s not already robbed us.

  11. doc holiday

    One last thing, as I fade to black.

    The Party Dresses Need To Come Off!

    We need members of Congress and The Senate and all adults with more than a 5th grade education to become involved in saving America from The Crooks. It doesn’t matter if you think Obama has a clue, or that McCain will be given clues, or if one political party is superior or confused — The Party Dresses have to come off and the objective of political drama must stop, just as wall street corruption must stop ASAP.

    This economic chaos is taking America backwards, beyond The Great Depression and towards The Revolutionary War. This generational challenge to our nation will impact our future and as history looks back at the inept political corruption of this era, there are members of Congress and The Senate who will be remembered in history books as being part of this problem, part of the corruption, joined in collusion to a cause that destroyed America, connected to corruption and deceit.

    My wish and prayer, is that these foul people will be thought of in the future with the same contempt as traitors!

    Re: In Dante Alighieri’s Inferno, the lowest circles of Hell are reserved for traitors; Judas, who betrayed Jesus, suffers the worst torments of all. His treachery is in fact so notorious that his name has long been synonymous with traitor, a fate he shares with Benedict Arnold, Marcus Junius Brutus, and Vidkun Quisling.

  12. FT Woods

    I did some back of the envelope math this weekend and completely freaked myself out when my figures reached over $3 trillion.

    imho, Americans need to stop lying to themselves about fantasy tax cuts, how much things really cost and who pays.

    Between the $700 billion for the Iraq war and the $700 billion for Wall Street, we could have had 20 years of universal health care for every man, woman and child in this country.

  13. Anonymous

    apan’s Failure

    In the 1990s, a Japanese government effort to buy troubled assets from banks to free up lending failed because sellers weren’t willing to accept the prices offered, said L. William Seidman, a former chairman of the Federal Deposit Insurance Corp. He said that wasn’t a problem he had as chairman of the Resolution Trust Corp. in the U.S., which sold off failed lenders’ assets after the savings-and-loan crisis of the 1980s.

    “If you’re talking about institutions that haven’t failed, then you have the question of whether they want to sell at a low price, particularly if that price depletes their capital,” Seidman said in a telephone interview today.

    “In Japan, we did all kinds of things, trying to have a mediator who would set a price and other kinds of methods to get around that,” he added. “It never really got done, so it was not successful, but here we probably have a more urgent need for more institutions to do something.”

  14. hbl

    I’m surprised that there has been no comment on Ohmae’s statement that this is a liquidity crisis (as opposed to a solvency crisis). I was under the impression that the strong weight of evidence points to a crisis of solvency, especially as discussed on this blog.

  15. Anonymous

    Well thank God we have Dominique Strauss-Kahn at the IMF; I don’t see how a French socialist (at least ostensibly) would be near as punitive as we were to Argentina.

  16. Kujo

    Dean,

    We have to figure out how to create real jobs somehow, in the long run it’s the only way we get out of this mess. This is a problem created from the top down that will need to be fixed from the bottom up. Nothing tangible is created at the top of this pyramid.

    Kujo

  17. dr q

    My old meme was Slow Motion Global Financial Apocalypse (TM)

    Unfortunately, the pace seems to have picked up, so slowmo might no longer be appropriate. In an effort to stay ahead of the curve, I’ve begun propagating a new meme:

    “The Great Depression part II is no longer my worst case scenario, now I’m worried that we’re at risk for Wiemar Redux.”

    Clearly a recession is baked in already. A long deep recession in which the economy actually contracts and unemployment gets out of hand seems like a definite possibility.

    What I’m really scared about is that given the obvious failings of our political culture are we going to react to this by trying to scapegoat someone? Or rather, are the oligarchs who are cementing their control going to react to a rise in populist anger by trying to scapegoat some internal or external enemy?

    I know this sounds totally crazy, but two years ago who thought we’d be talking about an IMF facility for the US? (Apart from Nouriel that is) And if we’d dealt with this two years ago, would be this screwed right now? I’m not sure how we’d try to immunize the country against fascism, but I think it’s worth thinking about while there’s still time to do something about it.

  18. JO

    So a consultant from Japan is giving the US advice? Obviously Japan has been a case study of pathetic crisis management: 1) They can’t keep a Prime Minister for longer than a year or so, 2) With the exception of 2004-2007 or so, their economy has been a deflationary disaster despite all the “advice” of Western consultants, advice which politicians have turned into a catastrophic tax and spend program of epic proportions and has left the country sadly in debt and with one of the world’s worst tax codes, 3) The only thing that saved Japan from going bust in the phenominal private savings rate which helped deal with the RE bust and economic problems and allowed rates to remain low. Sorry to say that while Japan’s problem was mainly RE and corp credit but with high savings of private citizens, the US is in much worse shape. Good luck to you.
    JO

  19. JO

    I should add that most of the advice of the IMF to countries over the last 20 years has been a disaster: It usually amounts to 1)Elimninate deficits by: Raise taxes astronomically (killing the economy and driving deficits higher in most cases, cutting government spending a lot (austerity), and raising interest rates significantly to “protect” the currency (of course, in most cases, currency sank even harder). In fact, it is quite easy to make a case the IMF is often used as an extension of US foreign policy as most of their “advice” appears to have sinister intent behind it. And the results are disastrous. Terrorists with brief cases? Possibly.
    JO

  20. Michael Fiorillo

    Structural readjustment comes to the USA: desperate states and localities selling bridges, highways and other infrastructure, civil service and public education gored and/or privatized. What little is left of the public sector, with the exception of its coercive elements, finally “drowned in the bathtub” as Grover Norquist put it so picturesquely.

    Fear for the life of the republic, and act to defend it.

  21. Anonymous

    Jo, I agree with you. The IMF has definitely not been a charity organization. I live in Brazil and president Lula is proudly screaming that the IMF is no longer in Brazil and that ‘speculative capital’, ie those banks like Lehman, keen to bet Brazil under the carpet, are now going under themselves.

    The IMF remedies have been a total nightmare. The same goes for Argentina and other nations. It’s pro-cyclical, ulta-orthodox Chicago school capitalist hostage taking by the IMF that a nation like the US will not likely be willing to undergo.

    would the IMF force the US to stop subsidizing its
    ‘industrial military complex’ through a pentagon budget squeeze?
    Would this be the end of medicare, medicaid and what not? What would this ‘new’ IMF monitored economy look like?

    Hardly likely that the IMF would be the caretaker of such a bailout, unless the IMF takes a 180 degree turn in terms of its classic recommended remedies / bailout policies.

  22. Anonymous

    Does anyone else find it odd that private money is sitting on the sidelines. Was this money most likely made off the antiquated real estate and greedy wall street models the last 10 years? Outside of confiscating the money can we legislate this money to make a long term investment in America? Main Street is demanding to see “blood in the streets”.. This 1 percent of the wealthy .. where are they?

  23. Frank

    And all of this brought to you by the Reagan revolution, now proven to have been produced by smoke, mirrors, and free market ideology. Long live the GOP, the Party that wrecked America!

  24. Anonymous

    If you’re talking about institutions that haven’t failed, then you have the question of whether they want to sell at a low price, particularly if that price depletes their capital,” Seidman said in a telephone interview today.

    Anon at 7:00 hit the nail on the head. No matter how scary it is, we HAVE to let these banks fail. It’s the only way to free up those assets.

    There are thousands of small, solvent banks to work with main street. We are resourceful. We’ll figure it out.

    It was probably scary to declare independence from Britain, to refuse to let the south secede, to ride on the front of the bus.

    But sometimes, you gotta whatcha gotta do.

    m

  25. El Cid

    The purpose of such a maneuver would not be to stabilize the economy of the United States, but to allow other nations of the Earth to bring the Empire under control.

    And maybe if we're going to be this irresponsible with our wealth & power on the world stage, maybe it's time they did it.

  26. k

    Incidentally, Andy Xie, former chief economist of Morgan Stanley in Asia, estimates it will take about 5.5 trillion dollars to “recapitalize” the US. He even suggests a debt/equity swap solution with China, Japan and GCC countries. Since the article is behind subscription firewall, I take the liberty to paste it here.

    ——————
    Saving America/

    The U.S. financial system could go under without swift action from the global community.

    By Andy Xie, board member of Rosetta Stone Advisors Limited

    Banning short selling, establishing a government entity for warehousing bad assets, and guaranteeing money market funds have brought relief to financial markets. But this may be temporary. The U.S. still needs to find money to pay the losses from disposing of bad assets, decreasing leverage in the real economy and financial sector, and finding a non-debt-driven method to make the economy grow. The road ahead will be long and hard. The global community may have to work together for a solution.

    Market pressure has forced the U.S. government to adopt the barrage of new measures. The origin of the crisis is excessive leverage, especially at Wall Street brokerages. Short sellers have learned to bring them down. They short their shares to create a panic that sends their trading counterparts fleeing. The resulting loss of liquidity bleeds the highly leveraged brokers to death. Obviously, banning short selling allows them to live longer. Ironically, Wall Street created the short sellers or hedge fund industry after the hi-tech bubble burst to juice up its businesses. Like a modern day Oedipus tragedy, they have come home to slay their parents and take their homes.

    However, technical changes don’t alter the fundamentals. Businesses that live solely on increasing leverage are no longer viable. Deleveraging is inevitable, which could lead to a gut-wrenching recession. Every sector in America is overleveraged. Where can they find the money to recapitalise the economy?

    The solution to America’s crisis must involve the countries that own US$ 10 trillion in foreign exchange reserves. The U.S. economy is undercapitalised. An internal solution is usually one form of debt replaced with another. The current proposals fall into this category. When the shell game runs out of options, printing money is the only way out. That will eventually lead to the U.S. dollar collapsing and hyperinflation in the U.S. economy.

    The world should come together to prevent such a tragic ending. Countries with big foreign exchange reserves like China, Japan, Kuwait, Saudi Arabia and the United Arab Emirates, for example, should sit down with the U.S. government to find a way to recapitalise its economy. They should swap their U.S. dollar assets in debt instruments like treasuries for equity assets like stocks.

    The world has a vested interest in ensuring an orderly resolution to the U.S. crisis. If America prints money to solve its problems, it will lead to the destruction of other nations’ wealth in U.S. dollar assets and a global depression of unimaginable proportions. Rising leverage in the U.S. has driven the demand growth in the global economy in the past decade. The high foreign-exchange reserves of its trading partners and the excessive leverage of the U.S. economy are two sides of the same coin. It seems that both sides need to participate in a solution.

    The U.S. needs to change its policy towards foreign investments. Its xenophobia about investments from non-western nations is a major barrier.

    The magnitude of the debt-equity swap needed is massive. The U.S.’s non-financial sector debt rose to 226 percent of gross domestic product (GDP) last year, up from 183 percent of GDP 10 years before. The financial sector debt surged to 114 percent of GDP, from 64 percent during the same period. The real economy may need 40 percent of GDP in extra equity, or US$ 5.5 trillion, equivalent to one-third of America’s stock market capitalisation. Foreign capital should be sought for at least half the amount needed.

    The capital requirement for the financial sector depends on how much it deleverages. The required deleveraging is probably between US$ 5 trillion and US$ 8 trillion. A significant portion of that is bad assets. As the total losses could be similar to the total amount of capital in the U.S. financial system before the crisis began, it may be necessary to let foreigners become majority owners of its big financial institutions. During the past year, U.S. financial institutions have sold minority stakes to sovereign wealth funds around the world. With no control over these institutions, other nations are of course resentful of the terrible losses they have suffered. In future fund-raising, U.S. financial institutions may have to sell controlling stakes to foreigners.

    While the above proposal is a win-win for the world, the odds of it being implemented are quite low. The U.S. still has an unrealistic view of itself. Its domestic politics are too insular and xenophobic. Even though the U.S. is the largest debtor in the world, it behaves like the largest creditor. Americans may need much more hardship to change their attitude.

    The next step seems to be to shift private-sector debt to the public sector. The proposed government body to take over bad assets provides such an instrument. In theory, it unwinds by selling bad assets along the way. But who would the buyers be, and who would be responsible for the losses? Everyone in the U.S. has too much debt already. Only foreigners can provide the equity capital required for the final debt-equity swap. However, the unwillingness to accept capital from non-western countries may push the U.S. to print money. The Federal Reserve can purchase whatever papers the federal government issues to cover the losses in the bad-asset disposal. That will lead to high inflation. When foreigners dump their U.S. dollar assets, the dollar will crash, and the U.S. may experience hyperinflation and economic chaos.

    To protect themselves against such a scenario, foreign governments should switch their treasury holdings into stocks. These preserve their value better during inflationary times. U.S. stocks are valued fairly. They may decline in the coming months, but they are better value than treasuries now. Central banks should put wealth preservation ahead of all else.

    Ironically, if foreigners switch from treasuries to stocks, it will ease the equity-capital shortage in the U.S. economy and discourage the Fed from printing money by pushing up treasury yields. Perhaps foreigners can save America.

    First published in Southern Morning Post on September 23, 2008.

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