The Financial Times give us yet another sorry update in the bankster vs. the general public saga, and the banksters continue to gain ground. Their latest about-to-be-cinched victory is beating back a pro-reform idea sponsored by Senator Dodd (yes, even he can have the occasional “Nixon Goes to China” moment). Dodd had wanted bank regulation to be stripped from the Fed and housed in a new agency.
While that model can be argued to have led to some fumbled passes in the UK during the early stages of the crisis (most notably, the Northern Rock run), many observers contend that the flaw was the failure to hash out certain operational details, rather than the structure being inherently unworkable (in general, any organization structure is going to have particular shortcomings; you therefore need to have other mechanisms in place to compensate for them).
Perhaps most important in the case of the US, the Fed is far and away the most captured, the most asleep at the switch of the banking regulators. Keeping them in charge of bank regulation is like reappointing a fire commissioner who let half the town burn down.
And the “compromise” settled upon is to allow the banks most in need of tough supervision, ones with more than $100 billion in assets (which amounts to the biggest 23, and thus includes all the 19 TARP recipients) to remain the wards of the supine Fed. Yet these are the ones that pose the biggest systemic risks. Heck of a job, Brownie.
The notion that makes this guaranteed-to-continue-to-be-weak oversight OK is that the big banks will be permitted to fail. While that may be credible for some of the really big banks (Fifth Third, for instance, is large but not systemically important) any large capital markets player is an integral part of crucial debt market operations. Those large firms in turn are deeply enmeshed via counterparty relationships, most notably repos and credit default swaps. How, pray tell, do you shut down a trading firm in an orderly fashion? You can’t freeze positions, which is what you need to do in an unwind, and not create pain and inconvenience for the counterparties. Are we going to have a firm in default (presumably with emergency credit lines) continue trading? I haven’t heard a credible solution to this rather major conundrum from the officialdom.
Ex starting a serious program to reduce the connectedness of these firms, I see only one of two likely outcomes: either a Lehman 2.0 (a firm will be allowed to fail because it will be politically necessary to have one fail, it will prove to be a mess, and then the officials, in a panic, will start bailing out the ones impacted by the unforeseen blowback) or a successor Administration will not trust the resolution procedures and will go directly to bailout (not doubt with a few punitive measures, like some forced divestitures of non-core businesses, to allow them to claim that it was not a bailout, but a new version of resolution lite).
Andy Xie reminds us that regulatory reform is a key precondition to a sustained recovery. His piece takes up one of our favorite themes: how the story of Japan’s colossal lost decades has been airbrushed here, to argue that the big Japanese mistake was insufficiently aggressive fiscal and monetary stimulus. By contrast, it is seldom reported here that the Japanese themselves believe that their big failure was not reforming their financial system in the initial years after the implosion. No one here wants to admit that we are following the failed Japanese playbook, and for the very same reasons: politicians are unwilling to take on powerful, entrenched financiers. From Xie (hat tip Crocodile Chuck):
Last year, in a moment of panic over the global financial crisis, central banks and governments poured monetary and fiscal stimulus into the global economy. The side effects of these misguided policies are already showing up….Despite the visible need for tightening, the consensus is demanding a slow and delayed exit. Japan’s “early withdrawal” is touted as an example of what could happen otherwise.
Japan has experienced two decades of economic stagnation since the collapse of the infamous bubble it suffered in the 1980s. The most popular explanations are that Tokyo wasn’t aggressive enough in stimulating the economy after the bubble burst, or that it withdrew its stimulus too early – or both. This line of thinking is popular among elite economists in the US, where it is rarely challenged. But few Japanese analysts buy it.
The Americans liken an economy in a slide to a car with a dead battery: it can be jump-started with a forceful enough push. But there’s no sound logic behind such thinking. After a big bubble bursts, an economy suffers a terrible misalignment between supply and demand. Through high prices, a bubble diverts investment and labor to unneeded activities. It takes time for an economy to normalize. The bigger the bubble, the longer it takes to heal.
The argument to “stimulate until prosperity returns” is popular because it doesn’t hurt anyone in the short term….. Japan’s tale is just a nice story that seems to support the argument.
At the peak of Japan’s bubble, the biggest in history, the excess value of its property and stock markets was more than five times its gross domestic product – more than the entire world’s gross domestic product at that time. In comparison, the excess asset value in the US bubble was less than twice its GDP, or half the global GDP. So how is it possible to just stimulate an economy back to health after such a massive correction?
Japan has run up the national debt equal to 200% of GDP — the greatest Keynesian stimulus program in history — all in the name of stimulating the economy back to health. It has failed miserably. Japan’s nominal GDP is about the same as when the stimulus began. Those who advocated the policy blame Japan’s failure on either the stimulus being too small or not being sustained for long enough – that is, the dosage, not the medicine itself, was at fault.
The bankruptcy of Japan Airlines is a sobering reminder of what is still wrong with Japan….Zombie companies that have first claims to resources have trapped the Japanese economy in stagnation for decades. The lack of shareholder rights has given the moribund companies the luxury of being able to disregard capital efficiency….
What ails Japan is a lack of reforms, not stimulus….
The crisis happened because financial professionals had incentives to bet other people’s money in a game they could not lose. With so many getting in on the act, the liquidity they threw into the trades made them effective, turning bankers into heroes, but only for a while.
The crisis showed that their behavior was indeed rational: while the losses to shareholders and taxpayers surpassed all the accounting profits that Wall Street reported during the bubble, those who made the trades are still rich, because they paid themselves bonuses in cash, not derivatives.
Obama has not been well-advised. His so-called accomplishment — stabilizing the financial system — comes from throwing trillions of taxpayers’ dollars at financial firms. He has behaved like a Wall Street trader: spending other people’s money with no thought of consequences. Anyone can do that…
Reform, not stimulus, is the solution. Only by limiting financial speculation can the foundations be laid for a healthy recovery, and to prevent another crisis.
I am to the point that I strongly believe that short of a cataclysmic rise in unemployment or a global financial collapse, (starting in Europe?) nothing shall be done in terms of reform, be it EFCA, CFPA, health care or whatever you can think of.
We have become a sclerotic society, paralyzed by the special interests in place, a totally dysfunctional political system afflicted by a terminal addiction to campaign money and outmoded ideology;and let’s not forget a media which only ambition is to preserve access to those in power and get the best ratings, no matter what.
We are royally fucked!
What makes you think we aren’t on the brink of a cataclysmic rise in unemployment or a global financial collapse? My Magic 8 Ball says signs “point to yes”.
Reform will never work in the context of the current system.
The best answer I’ve come across:
“Obama has not been well-advised.”
Not true. Obama believes this stuff and chose advisers who reflect his views. He very obviously did not bring into his Administration Jamie Galbraith, Dean Baker, Joseph Stiglitz, Bill Black, Simon Johnson, Robert Johnson, or Michael Greenberger to name a few.
“Reform, not stimulus, is the solution”
We need both. We have seen none of the one and little of the other, and no, financial industry bailouts do not count.
Japanification is the best case scenario for us at this point, but I think this is unlikely. Our elites are too corrupt and too incompetent. Depression, in my opinion, still looks the more probable result.
What Dodd says he wanted (pulling regulatory authority from the Fed) may not be what he really wanted at all. Like most politicos, the man recites his lines with a forked tongue.
One thing’s for sure. By now no one who’s not a conscious villain himself can any longer claim that anything that’s happened was any kind of “honest mistake” rather than a calculated crime.
That they have systematically refused to enact reform, thwarted every meager try at it, and instead further entrenched every practice that is known to have brought on the crash, is a retroactive validation of everything that went before as an intended act, and empirically proves their absolute intent regarding every subsequent act.
So as the Second Great Depression sets in, let everyone be clear that it’s a conscious, systematic assault by the banks and government on the people.
I couldn’t agree with you more. Everything accomplished politically in the last 10–30 years points to world domination by the FED duopoly with BIS.
Just the name of the BIS (Bank of International Settlements) is a tip off. It has the ring of a mere clearing house perhaps for international checking accounts or some similar functionary role rather than the other half of a duopoly with the US FED engineering a 30-year heist of the people whose work and loyalty to each other has been and continues to be squandered.
You might want to look into the history of the BIS. It originally was the clearinghouse for Germany’s reparations payments, got repurposed over time.
I find it hard to understand why “any large capital markets player is an integral part of crucial debt market operations” is incapable of being broken up into pieces and sold.
Take Citibank and Bank of America for instance. Let’s start by ripping off their credit card divisions, selling them to the highest bidder, and using the money to help repair their balance sheets. How could that cause a systemic problem? Then let’s rip off their retail banking businesses, with all of their branches, and FDIC insured deposits, and plain vanilla loans – like loans to small businesses, and non-defaulted mortgages, etc, etc — and break them up into 10 or 20 or 40 pieces and sell that to dozens of medium sized banks. Where would be the downside of that? Just getting all of those deposits and assets out of the hands of Citibank and Bank of America and onto the balance sheets of dozens of healthy banks would be worth any amount of trouble associated with this.
Then, how about their trading desks – for currency, and existing issues of stocks and bonds? Any systemic risk in spinning those off as private entities? Or selling them to the highest bidders? If there was a lot of money to be made doing that, I bet they would be able to figure out how to do it in a weekend. Or, if it isn’t profitable enough to sell or spin off, what systemic problem would there be with honoring all of their current contracts, but NOT SELLING ANY MORE CONTRACTS?
Ditto with all of it’s other esoteric trading activities. If no one wants to buy this department, what’s wrong with honoring all of the existing CDS’s, and futures, and options, but not letting them sell anymore contracts.
Ditto with their floating of new issues of debt for large corporations. Surely there are dozens of companies that would love to buy those departments? And if there aren’t, sure that is a hint they ought to be wound up.
Then when we are all done, we take a look at how much money we got from selling all of those pieces, and split it up amongst it’s bondholders.
Or better yet, how about going in on a Friday, and announcing that Citibank is bankrupt, and that all of it’s bondholder’s debt was just converted to equity, BUT THAT ALL OF IT’S OTHER CONTRACTS AND OBLIGATIONS WILL BE HONORED, and putting an interim CEO and board of director’s in place until the new shareholders can hold a shareholders meeting.
Why would doing that cause systemic problems?
With the case of Citi, the $500 billion of uninsured foreign deposits are a monster problem we will put aside for now.
You are missing the key point. It isn’t the credit cards, it’s not the retail branches. It IS the global debt market trading machine, the OTC business. That is massively integrated. All books trade in relationship to Treasuries. All books are traded on a 24 hour basis. The books are interrelated (Treasuries serve as the base rate for all $ fixed income….that redounds to credit default swaps…managing the CDS book requires the use of interest rate swaps…). The book sit on an integrated IT platform with risk management tools (even if they are deficient, a faulty map is preferable to none at all).
It requires 100% of the infrastructure to be in this business. It therefore has both massive economies of scale AND massive barriers to entry (the staff and the systems). Have there been any new entrants in the last 20 years? No.
And how do you break them up? Each part requires the full infrastructure. You duplicate the infrastructure (um, how do you get the bodies?) and try divvying the businesses, you have two monster money losers.
It cannot be reformed. The only solution is to abolished the entire system.
If we as a country continue to demonstrate impotence to control our own affairs and lawlessness, outsiders will call the tune –and it won’t be pretty.
I believe you are half right but it comes down to the amount of reformers that come to power in the next two elections in reforming the entire system.
Voter revolution of throwing all incumbents out is a start and we will certainly see that in 2010 and 2012 elections. Dodd is no fool, he knows he will not be reelected.
If the percentage of new leadership is not sufficient to completely overhaul our financial industry after 2012, I will not be surprised to see Joe Stack type events daily. Let’s hope violence is not determined the only answer by the population.
Except that I believe this is a generational problem: “Don’t trust anyone over 30” when they were 18 became ‘fire, retire and don’t rehire anyone near or over the age of 50.’
The ’60s generation gutted the country of knowledge, invented the wheel, drove the country into the ground, destroyed lower education and corrupted higher education; wiped out American history, (changing George Washington’s birthday to the generic President’ Day for instance)training, loyalty and expertise.They’re running the show, they had no respect for their elders, their elders caved before the power of a huge profitable consumer bulge, watched TV and get fat in more ways than one and don’t give a shit.
Right, Yves, I’m just an amateur here, trying to get up to speed.
When you say “It requires 100% of the infrastructure to be in this business.” you aren’t referring to the credit card business and the retail banking business are you? So we could force Citibank and BofA to sell those off (to shore up their balance sheets, and to simplify their business model)? That would be an enormous step forward, in my opinion, since then the ‘real world economy’ of making small business loans and consumer loans would not be negatively impacted the next time their “global debt market trading business” blows up.
Breaking up their retail banking businesses into 10-50 geographical pieces and selling them to small and medium sized banks, would be to me a massive step in de-risking the system. Even if we were still left with trading company that are ‘too important to fail’, at least the trading banks wouldn’t pass on massive balance sheet driven credit crunches to ‘main street’ retail banking. It would decouple the system (partly).
So, if the ‘systematically important parts’ of Citibank and BofA (or Goldman Sachs) the ‘trading desk’ part of these banks really are ‘too important to fail’, why does that prevent them from being sold to the highest bidders, OR THEIR BONDHOLDERS be forced to take over the company – ‘buying it’ by being forced to trade debt for equity?
The companies could KEEP TRADING while they were sold, or reorganized, if the US explicitly backed and guaranteed the TRADES while the reorganization was taking place.
Why is this different from a regular bankruptcy, or the sale of a regular company? If it was some retail firm, all that would be required for it to keep operating while it was being sold or ‘restructured’ would be the explicit guarantee that it’s suppliers, and customers, and employees were not at risk of loss. I’m no expert, but I know there a kind of bankruptcy where the company keeps operating. The difference here, maybe, is the senority of the debt – or who loses (who gets equity in exchange for debt). To keep the companies operating, short term counterparty (trading) debt (ie, the equivalent of suppliers and customers) would obviously have to be honored in full.
But long term corporate debt (like BOND HOLDERS) are investors, not customers, why should they be protected? I can see how that would make the bond markets a lot more leery to loan money to ‘trading banks’, but isn’t that just recognizing the risk that is already there? Maybe the US would have to reduce it’s guarantees on ‘trading banks’ debts little by little but surely the bonds of trading banks SHOULD BE MORE EXPENSIVE and lower rated than it currently is, to reflect the actual risks of the business.
If that makes ‘trading banks’ uneconomic, well then, why is that bad? IF they ARE INDEED uneconomic, that is true if the US taxpayer pays in the end, or if their bondholders and stockholders pay in the end. The only difference being that investors can say NO, and the market can respond by coming up with a different way to accomplish the task – like with limited partnerships with unlimited liability instead of public companies with shareholders and limited liability.
So, I still say, no matter how important the task they do, they can still FAIL – and be sold to new management. And that ALL of these banks (from Goldman, Sachs on down) should have been forced into reorganization in 2008 in exactly this way.
I can’t see any reason why counterparties couldn’t have been explicitly guaranteed, if that was deemed systematically important, or why trading couldn’t have continued, with all trades backed by the US government, if that was deemed systematically important, while the reorganization/bankruptcies took place.
100% correct. The short-term effects of TBTF banks going down would be a severe tightening of credit which is already happening now in any event: http://ragingdebate.com/economy/us-bank-lending-falls-at-fastest-rate-in-history .
My recommendation to President Bush in 2008 was to allow the speculating investment and commercial banks to fail and have the regional banks buy the assets for pennies on the dollar. Bush bailed out his personal buddies instead of letting them fail and Obama is no better.
Yves did merely mention in passing the foreign investors. Letting TBTF banks go under would have highly negative geopolitical consequences. However, as a national leader your obligation is to it’s native citizenship, not a cabal of Club International, LTD. The leadership have sold out in other words and until they are gone, the law of the jungle rules.
It’s pretty amazing to watch guys like Krugman and Stiglitz spinning the yarn that what killed Japan was a failure to engage in enough stimulus. I mean, how high can the public debt / GDP ratio go, exactly? In the meantime, all those empty roads, bridges, and airports aren’t doing a damn thing to add to the wealth and well-being of Japan.
The stimulus should be applied in the form a a ‘basic income guaranee’ (http://www.usbig.net/whatisbig.html)
Instead of forking the money into projects with no benefit give it to all people directly. They can then use it to pay for housing, food, clothes, communication debt downpayment.
That would be stimulus to believe in.
I think things will play out a lot faster in the US than in Japan. The way things were done in the US is inherently unstable.
One of the major parts of the bailout was granting access to the Fed Window for the brokerage houses. Now they have access to capital at .5% (far, far below that of any other business) and they are not encumbered by the restrictions of commercial banks on owning other businesses (if not directly then via their linked private equity funds and equity funds).
Warren Buffet certainly understood the value of this even if others didnt. Goldman received access to the Fed window on Sep 21 2008, he invested US$5B in Goldman on Sep 23 2008.
Coincidence? I don’t think so. Buffet had spent sixty years building up zero or near zero cost insurance float. Through exceptional underwriting over this period he had amassed US$60B in near-zero cost float. Of course he has to continually maintain this with disciplined underwriting.
When Goldman got funding at .5% of 8 times this amount (US$500B) of course Buffet jumped on it. They don’t have to work to maintain this through exceptional underwriting every year. The only question Buffet had was whether the profits would all leak out to the employees, as it had at Solomon. Hence his investment was in preference shares with a 10% coupon plus the equity warrants.
That low cost funding will allow GS and MS to become like supercharged versions of Berkshire with a much bigger warchest of low cost funding. They will lay claim on a bigger and bigger share of the US economy.
UNEMPLOYMENT IS NOW 25 MILLION AND WILL BE 50 MILLION BY JULY, THIS DEPRESSION IS JUST BEGINNING, WE HAVEN’T SEEN ANYTHING YET. NEXT TIME SOMEONE SAYS WE ARE GOING TO HAVE A JOBLESS RECOVERY, SMACK THEM, THAT IS THE MOST RETARDED THING I HAVE EVER HEARD.
DON’T WORRY ABOUT THE BANKS GETTING AWAY WITH ANYTHING – THEY ARE ON S.L.O.W. BLEEDOUT……….THEIR PARTY IS OVER. OBAMA IS GOING TO SQUEEZE THOSE EVIL CAPITALISTS OUT OF EXISTENCE – HE SAYS SO…LOOK AT HIM CALLING THE HEALTH INSURANCE PEOPLE ON THE CARPET LIKE HE DID THE CAR EXECUTIVES BEFORE HE TOOK THEM OVER AND GIFTED THEM TO THE UNIONS. WAKE-UP PEOPLE – THEY ARE NATIONALIZING US IN OUR FACES…………..
THE BANKS GOT THE FIRST ROUND OF GIVEAWAY TAXPAYER TRILLIONS AND BLEW THEM. NOW WE HAVE COUNTRIES AND STATES FAILING, THE BANKS ARE WAY DOWN ON THE “SAVE” LIST AND WILL FAIL AND MERGE TO THE TUNE OF 1000 THIS YEAR (FDIC ISN’T RAMPING UP FOR THE HECK OF IT). I MEAN FACE THE FACTS, WHEN WE NATIONALIZED THE BANKING SYSTEM (WHICH WE DID) WE SIGNED THE DEAL WITH THE DEVIL. WHEN WE OWN THE BANKS, AHEM, IT IS NOT NECESSARY TO HAVE MORE THAN ONE, ISN’T IT?
In relation to Andy Xie’s remark about ‘The Americans liken an economy in a slide to a car with a dead battery: it can be jump-started with a forceful enough push’
, I like to recall Neil Barofsky, the special inspector general for the TARP program, who said the following in his January 30th report to Congress: “It is hard to see how any of the fundamental problems in the [financial] system have been addressed to date…. Even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car.”
We found a telling paragraph deep in a WSJ piece from today that details how around ’05 Susan Bies tried to strip the (owned by guess who?) NY Fed of authority over Wall Street’s greediest, but Timmy blocked it. Turns out Ben’s band of Governors isn’t the problem at all, it’s the renegade Dukes of Moral Hazard squatting at the center of NYNY. Who knew?
Financial markets and monetary policies are the tail on the dog.
Japan’s real problem was that they were almost completely dependent on exporting manufactured goods to the US. By the 1980s there was increasing competition for the US market from other southeast Asian countries. And in the mid 1980s we demanded that the Japanese move some of their production to the US. Zombie companies did survive longer due to the Japanese government’s policies, but how does the timing of the zombie failures solve the real problem with their economy? The Japanese debt-to-GDP has increased as they spent to sustain what their economy could not but how has their spending worked to solve the real problem with their economy?
The US has a completely different problem in it’s real economy which I have previously described. We have masked that problem for 25 years by more and more loose monetary policy. That game is over. When they last loosened monetary there was little or no effect. Now if they tighten monetary policy it will slow the economy further but probably not as much as some expect. The move to stronger regulation of the banks, the bailout of banks, and the stimulus are not dealing with our real problem. American workers are the American consumers and recovery can not happen until American workers/consumers are employed providing goods and services to other Americans. The rest of the world is NOT going to suddenly begin buying more from us than they sell to us. Businesses will not spend into an economy without consumer demand. Government can spend into the economy without consumer demand but only over the short term.
There is nothing wrong with killing off zombies, stimulating a dismal economy, or correcting a completely inadequate system of regulation of the banks. But these are distracting us from pursuing a solution to our real problems. Our real problem is not even being discussed!
The Japanese groomed the tail of their sick dog and we are doing the same thing!
Another fine example of the Stockholm Syndrome at work, and working against the best interests of the public…
I sure your comment:
Obama has not been well-advised. His so-called accomplishment — stabilizing the financial system — comes from throwing trillions of taxpayers’ dollars at financial firms. He has behaved like a Wall Street trader: spending other people’s money with no thought of consequences. Anyone can do that…
The current block of taxpayer money that has been pledged by the US government and the Federal Reserve to prevent the system from collapsing, according to an analysis by Bloomberg News, is roughly $12.8 trillion as of March 31, 2009.
Know where most of this came from:
The following table details how the Fed and the government have committed the money on behalf of American taxpayers OVER THE PAST 20 MONTHS, according to data compiled by Bloomberg.
Mar 2009 and back 20 months;
3 months in 2009 12 months in 2008 5 months of 2007 that makes it August 2007. 4 months BEFORE the recessions OFFICIAL start. Cause of foreclosures.
— Amounts (Billions)—
Total $12,798.14 $4,169.71
Federal Reserve Total $7,765.64 $1,678.71
Primary Credit Discount $110.74 $61.31
Secondary Credit $0.19 $1.00
Primary dealer and others $147.00 $20.18
ABCP Liquidity $152.11 $6.85
AIG Credit $60.00 $43.19
Net Portfolio CP Funding $1,800.00 $241.31
Maiden Lane (Bear Stearns) $29.50 $28.82
Maiden Lane II (AIG) $22.50 $18.54
Maiden Lane III (AIG) $30.00 $24.04
Term Securities Lending $250.00 $88.55
Term Auction Facility $900.00 $468.59
Securities lending overnight $10.00 $4.41
Term Asset-Backed Loan Facility $900.00 $4.71
Currency Swaps/Other Assets $606.00 $377.87
MMIFF $540.00 $0.00
GSE Debt Purchases $600.00 $50.39
GSE Mortgage-Backed Securities $1,000.00 $236.16
Citigroup Bailout Fed Portion $220.40 $0.00
Bank of America Bailout $87.20 $0.00
Commitment to Buy Treasuries $300.00 $7.50
FDIC Total $2,038.50 $357.50
Public-Private Investment* $500.00 0.00
FDIC Liquidity Guarantees $1,400.00 $316.50
GE $126.00 $41.00
Citigroup Bailout FDIC $10.00 $0.00
Bank of America Bailout FDIC $2.50 $0.00
Treasury Total $2,694.00 $1,833.50
TARP $700.00 $599.50
Tax Break for Banks $29.00 $29.00
Stimulus Package (Bush) $168.00 $168.00
Stimulus II (Obama) $787.00 $787.00
Treasury Exchange Stabilization $50.00 $50.00
Student Loan Purchases $60.00 $0.00
Support for Fannie/Freddie $400.00 $200.00
Line of Credit for FDIC* $500.00 $0.00
HUD Total $300.00 $300.00
Hope for Homeowners FHA $300.00 $300.00
he FDIC’s commitment to guarantee lending under the
Legacy Loan Program and the Legacy Asset Program includes a $500
billion line of credit from the U.S. Treasury.
There are so many problems, Congress doesn’t know which way to look. I actually doubt any significant reform of the banks will get passed.
Xie: “Only by limiting financial speculation can the foundations be laid for a healthy recovery, and to prevent another crisis.”
Well that’s gotta be the most insightful response to the Mess I’ve come across so far. Excuse me a moment while I tweet that to Simon Johnson and The Epicurian Dealmaker — k.
Xie seems to be taking on Richard Koo, whose concept of “balance sheet recession” holds that, in the wake of a Minskian blow-out, government must take up the slack while firms rebuild their balance sheets. I guess Paul Krugman is the most prominent voice advocating that Koo’s idea be applied in the US, though I’ve no doubt he’d spank me for putting it so crudely.
The problem I have with Xie here, and Koo, and Michael Pettis for that matter who in his most recent post discusses Japan, is that none take sufficient account of historical, political or cultural contingencies. They pretend there is something called Economics, which, like the force of gravity, is transcendent.
Recently I re-read Tett’s Fool’s Gold and Bookstaber’s A Demon of Our Own Design. What makes these works valuable is that they place the reader in a real world during a certain span of time; a world of particular people, particular technological capacities and particular dominant and subversive paradigms.
Before going off to live in Japan for what turned out to be eleven years, I tried to read broadly on Japan and I took several high-level university courses about Japan’s history, society and role in East Asian security. I was interested largely because Japan, like Ethiopia and Thailand and precious few other places, was not colonized by “the west” and Japan was the first non-“white” nation to achieve parity with rich “white” countries.
Once I got there I had a hell of a lot of unlearning to do, of course, but all was not in vain. Japan is a very peculiar case, to an extent few people are really aware of or willing to acknowledge. I advise extreme caution when encountering an argument that attempts to generalize much of anything from the Japanese experience.
Yves says: “No one here wants to admit that we are following the failed Japanese playbook, and for the very same reasons: politicians are unwilling to take on powerful, entrenched financiers.”
True enough, but it’s hard to overstate how strongly the influence of the construction industry (in the US a weak analog might be the “defense” industry) and the over-weighting of rural votes played in the policy response. Which kept unemployment low and the LDP in power, as it still is since the Ozawa gang is just a minor eddy in the LDP vortex.
Ken Rogoff recently wrote, “Old people [in Japan] have retreated to villages, many growing their own food, their children having long abandoned them for the cities.”
Hate to break the news to you Mr. 90%, but it’s no secret that the zaibatsu/keiretsu for generations got together with the government to export entire graduating high-school classes from the hinterlands to the industrial sacrifice zones. Rural depopulation was a consequence of state policy to avoid colonization and build industrial capacity, not a matter of children choosing to abandon their parents. Those old people didn’t retreat to their villages; a residual population was kept in place to raise “Japanese” rice and vote conservative.
Speaking of labor, for several years I edited translations of papers written by researchers at a think-tank sponsored by Japan’s Ministry of Labor.
In the late ’80s it was all about how to encourage unenlightened Thais and Tennesseans to sing the company song. By the late ’90s it was all about how Japan was failing in terms of creativity and entrepreneurship.
My problem with people like Xie, Koo, and Pettis is this: OK, after the Plaza Accord the Japanese decided to ramp up an asset bubble (see Edward Chancellor, Devil Take The Hindmost). OK, it went bust. Sure, finance was a mess.
But… this happened at the same time Japan had truly “caught up.” Nothing I’ve heard from Economics about the lost decades addresses the contingent historical, political or cultural aspects of a society (yeah, I know that’s a loaded term and there ain’t no such thing, right Senator Malpass?) that configured itself in terms of catching up to TPTB and, basically, just ran off a cliff in a Wile E. Coyote moment.
“What ails Japan is a lack of reforms, not stimulus….”
It’s too correct to acknowledge. Nobody, I think, argues against it in my country, Japan. But I might want to add one thing to Xie’s argument. That is, fiscal and monetary stimulus more or less played a role in sustaining Japan’s recovery, even if that recovery is minuscule.
What is worrying me is conservative attitude among young people. New graduates are going to big firms because they think those firms are “too big to fail”. Toyota is rescued, and Japan Airlines is forced to recover under government control. Though pay may be cut, job is largely secured. They didn’t go bust. It’s safe. That’s how zombie companies survive.