Japan’s Experience Suggests Quantitative Easing Helps Financial Institutions, Not Real Economy

A few days ago, we noted:

When an economy is very slack, cheaper money is not going to induce much in the way of real economy activity.

Unless you are a financial firm, the level of interest rates is a secondary or tertiary consideration in your decision to borrow. You will be interested in borrowing only if you first, perceive a business need (usually an opportunity). The next question is whether it can be addressed profitably, and the cost of funds is almost always not a significant % of total project costs (although availability of funding can be a big constraint)…..

So cheaper money will operate primarily via their impact on asset values. That of course helps financial firms, and perhaps the Fed hopes the wealth effect will induce more spending. But that’s been the movie of the last 20+ years, and Japan pre its crisis, of having the officialdom rely on asset price inflation to induce more consumer spending, and we know how both ended.

Tyler Cowen points to a Bank of Japan paper by Hiroshi Ugai, which looks at Japan’s experience with quantitative easing from 2001 to 2006. Key findings:

….these macroeconomic analyses verify that because of the QEP, the premiums on market funds raised by financial institutions carrying substantial non-performing loans (NPLs) shrank to the extent that they no longer reflected credit rating differentials. This observation implies that the QEP was effective in maintaining financial system stability and an accommodative monetary environment by removing financial institutions’ funding uncertainties, and by averting further deterioration of economic and price developments resulting from corporations’ uncertainty about future funding.

Granted the positive above effects of preventing further deterioration of the economy reviewed above, many of the macroeconomic analyses conclude that the QEP’s effects in raising aggregate demand and prices were limited. In particular, when verified empirically taking into account the fact that the monetary policy regime changed under the zero bound constraint of interest rates, the effects from increasing the monetary base were not detected or smaller, if anything, than during periods when there was no zero bound constraint.

Yves here This is an important conclusion, and is consistent with the warnings the Japanese gave to the US during the financial crisis, which were uncharacteristically blunt. Conventional wisdom here is that Japan’s fiscal and monetary stimulus during the bust was too slow in coming and not sufficiently large. The Japanese instead believe, strongly, that their policy mistake was not cleaning up the banks. As we’ve noted, that’s also consistent with an IMF study of 124 banking crises:

Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.

Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions’ liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery.5 Of course, the caveat to these findings is that a counterfactual to the crisis resolution cannot be observed and therefore it is difficult to speculate how a crisis would unfold in absence of such policies. Better institutions are, however, uniformly positively associated with faster recovery.

But (to put it charitably) the Fed sees the world through a bank-centric lens, so surely what is good for its charges must be good for the rest of us, right? So if the economy continues to weaken, the odds that the Fed will resort to it as a remedy will rise, despite the evidence that it at best treats symptoms rather than the underlying pathology.

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  1. Ina Deaver

    Worse, it is only good for the current management of the Fed’s charges — not the charges themselves, the depositors of those charges, even really the shareholders. . . . .

    Incredibly stupid. The Fed’s actions are the equivalent of watching to people negotiate a minefield, one of them getting injured but making it out alive (Sweden) and one of them getting trapped in the minefield and forced to stand there, sweating, until they lose consciousness and probably die (Japan). And deciding to follow the footsteps left by the second.

  2. Dan10400

    Incredibly stupid is an understatement. Incredibly evil is probably more appropriate. And nothing is more frustrating than the feeling of not being able to do nothing about it.

  3. Bates

    Free market capitalism in the US no longer exists.

    It is impossible to have free market capitalism and a central bank that sets interest rates and regulates money supply.

    The Federal Reserve has no more notion of what interest rates should be than I do. Only a free market can determine real interest rates…and, since money is loaned into existance only a free market can determine how much money is enough.

    When interest rates are set too low by the Fed money becomes cheap and is malinvested, leading to bubbles, which invariably collapse. No bubble in history has been successfully reinflated but that does not stop the Fed from ‘trying’.

    The difference between the boom bust cycle of true free market capitalism and Fed controlled capitalism is that the Fed can plan booms and busts and the friends of the Fed can benefit accordingly. In free market capitalism the booms and busts are naturally occuring events and large investment banks are no more likely to come out winners than the average trader…depending on skill and luck.

    If failed institutions are not going to be liquidated by a free market they will become wards of the state and forever be a drag on the economy of the state…and the people who pay the taxes. Japan is one example. The US is becoming another example.

    The Fed is the most powerful organization in the world and it will do all in it’s power to maintain it’s status.

    Those that govern without the best interests of their citizens placed above all else have forfeited their right to govern.

    1. Tao Jonesing

      Tom Hickey (comment below) is right, and if the Fed is powerless to do anything in the current situation (i.e., a liquidity trap), then it isn’t all that powerful, is it?

  4. MikeNY

    The Fed and White House made the decision in 2008 not to nationalize the banks, and to protect bondholders from loss. That decision was IMO wrong; but given that decision, the Fed is pursuing quite logically the official strategy: recapitalize the banks. That means asset price reflation.

    The Fed will not change course unless Congress and the White House change course — and fiscal policy comes back into play.

    Good luck with that.

  5. Tom Hickey

    The Fed cannot assist the real economy because all it can do is affect reserves balances and interest rates.

    It cannot alter nongovernment net financial assets by injecting currency directly into the economy on a net basis. The way notes and coin enter the nongovernment system is by commercial banks exchanging bank reserves for them.

    Moreover, the Fed can increase reserves all it wants and it can lower rates, too, but it cannot compel banks to lend unless they choose to do so — which they only do if there is demand from creditworthy borrowers willing to accept terns profitable enough to banks to be entice them to lend.

    Low interest rates and high excess reserves that pay interest simply serve to give the financial sector a subsidy so that it can recapitalize after depleting itself through imprudent lending. The Fed is also extending forbearance as part of “extend and pretend” to give troubled banks time to get back in shape. This is not coincidental. It is a strategy. Easy to tell whose side the Fed is on.

  6. i on the ball patriot

    “So if the economy continues to weaken, the odds that the Fed will resort to it as a remedy will rise, despite the evidence that it at best treats symptoms rather than the underlying pathology.’

    Treating the symptoms IS the underlying pathology. This an an intentional grounding of the global economic football by the wealthy ruling elite — a herd thinning shift into perpetual conflict. Mr. Global Propaganda [The noble lie.] rules Mr. Global Market. Mr Global Citizen’s ability to trust and love has been intentionally and incrementally replaced with fear, anxiety, divisiveness and uncertainty. Vanilla Greed for profit is dead. Pernicious Greed for control is now clearly at the helm. Citizens of the world globally have lost what little control of their governments that they have had.

    Japan, closely controlled and used for societal R & D since W.W.II, has been a pilot program for the financial machinations and programs that pit one citizen against the other; the prudent against the not so prudent, the intentionally bloated government worker against the non government worker (the private sector vs government sector scam), etc., the societal results are the same globally, and now formula, as can be seen in this blog excerpt from Japan. Note in the rest of the blog the same limited political divisions that have been instilled and the lament at the loss of the good old days of Vanilla Greed …


    “One thing that really set off this train of thinking in my mind was a visit to Shibuya the other day. It was the first time I had been to Shibuya in quite a while. I had to wait for a business associate in front of the station. Oh, how things have changed in Shibuya over these last 30 years.

    I looked out across from the police box in front of the station at Hachiko and then it dawned on me: Urban decay. The place was starting to fall apart. It was dirty, the tiles on the street were crumbling and in need of repair, there was trash on the streets, and it was the kind of dirty that reminded me of downtown Los Angeles.

    Forgive my rose-colored glasses, but Japan is not supposed to look like downtown Los Angeles or Thailand or Hong Kong…

    No disrespect for Thailand or Hong Kong, I love those places, but looking out from in front of Shibuya station, I couldn’t tell if I were in Japan or some south eastern asian country! This might not seem a shock to you, but remember that this is the #2 or #3 economy in the world… It should not look at all like some broken down third-world nation.”


    This is not an ‘economics’ problem. Its a pure raw mean ass age old cyclical political problem in a newer and more deceptive suit. The global elite rich have hijacked the governments of the masses and now have the respective citizens in each nation by the balls and now the throat too.

    Wresting control from them will be difficult as the damage that has been done to the global psyche in the past forty plus years is formidable. Humanity stands now as one big dysfunctional global family well laced with fear, hate and intentionally instilled, very limited, cannibalistic political viewpoints. The intentional global morality shift backward to those uncivil and disrespectful of fellow humanity viewpoints has been effective and examples of it are everywhere. Go back and read all of those cannibalistic adoring libertarian comments in the, “What is the Proper Libertarian Response to Concentrated Corporate Power?” comment thread.

    Scamericancentric thinking is futile. This is a global take down of the now rapidly disappearing middle class and the masses. Broadening viewpoints and focusing on the global network of top parasites is essential for positive change. And dear Jesus, please stop talking about the tooth fairy like fantasy of, ‘free markets’ and ‘capitalism’!

    Deception is the strongest political force on the planet.

    1. anonymous

      I was in Shinjuku this afternoon. The streets are spotless, re: trash. There is a high level of grime, Japan still uses a lot of diesel. As for the decay, older non-public buildings get a face lift as often as their owners deem necessary and it is probably fair to say that a slightly greater number could use a coat of paint than five years ago.

      There are two extremely-well maintained public swimming pools within walking distance of our new, extremely comfortable home in west Tokyo. Japan has poverty, homelessness, and every other problem we’d expect to find in any society.

      Betting against Japan is like betting against the US. Japan is going through a period of change at a time when other economies are expanding. Brazil, South Africa, India, and Turkey, to a degree, can all expect higher levels of growth than Japan. That doesn’t mean Japan suddenly has slums like Rio or that Japan will. China should be the number one or two economy in the world, followed by the US. Japan fits somewhere alongside Germany.

      Local communities remain safe, vibrant, and tightly-knit. Many companies are going to limit hiring this year as they did last, but the folks I deal with reported good levels of growth in the first quarter. It’s a great place to live and work.

      1. i on the ball patriot

        Anonymous said: “Japan has poverty, homelessness, and every other problem we’d expect to find in any society.”

        You make my point, poverty and homelessness was minimal in Japan forty plus years ago and the society was much more cohesive with paternalistic corporations that protected employees even in down times. You would not have expected to find poverty and homelessness there then.

        I’m not “betting against Japan”. I’m revealing the formula machinations of the global wealthy ruling elite through their central bank control and the imposition of their neo liberal/neocon two tier societal ideology of ruler and ruled around the globe.

        The picture you paint is very rosy and surprising when juxtaposed with the link I provided and this report from August, 2002 — over eight years ago — by Dignity Village. I have been led to believe that the economic situation in Japan has not materially improved since then, in fact many say it has become worse …


        “From an article in late July in the ‘Japan Times’, it said there were (only) some 20,000 homeless in Japan (and I read other ‘official’ figures that state there are 30,000 homeless), with most of the homeless located in Tokyo and Osaka, which the article said had some 8,000 homeless. This article mentioned that each governmental unit (prefecture) is responsible for its homeless policies (shelters, payments to homeless, etc.) and that such policies vary considerably, being far more ‘generous’ in the Tokyo area and being more restrictive in the area with the greatest number of homeless, Osaka. Tokyo has some 25 million people in the area and about 13 million in the city proper. I believe Osaka, the second largest city, has about 9 million in the area. If you go strictly by the ‘city’ definition, then Tokyo has about 13 million, and Yokohama, at the foot of Tokyo Bay, is next in population at around 4 million or so (normally it is clumped in with Tokyo, and Osaka then is the third largest city with only about three million proper! I suppose statistics do with homeless populations much as they do with cities’ population numbers, that it depends on what is included and a little of what you’re trying to illustrate.

        The same article mentioned that there was some limited financial support for homeless individuals, which seemed to be in the range of about $300 per month (quite a bit higher in Tokyo) but that depended on the local governmental policies and that the payments were limited in the time frame you could get the payments. As more shelters are being built (especially in Osaka), I was told that such payments are being eliminated entirely.

        Yet, the homeless supporters in Osaka said there are about 20,000 homeless alone in Osaka, so my guess is that the governmental and ‘official’ figures are way, way low. Homelessness is growing rapidly in Japan, especially since the country is still in the midst of a 13 year recession, and companies are increasingly adopting what I think of as American techniques – layoffs, especially with their more costly ‘senior’ employees. It used to be, of course, that you had a strong loyalty between a company and its employees – sort of like a family, really – and lifetime employment. This has changed. Further, the family dynamics are changing which is creating all sorts of new stress in this society – an epidemic of sorts. So, the US (and other countries) is succeeding in exporting its business philosophy and some of its values or lack thereof, no doubt increased by the WTO accords. Bottom line: the homeless situation is rapidly becoming worse in Japan.”


        Here is Dignity Village today in Portland, Oregon (link below). Nose around the web site and notice that they are forming their own ‘governments’, yet are still subject to building permit fees for public bathrooms and showers. Fees charged by the same — morally twisted by Mr. Global Propaganda –scamericans that still have jobs in the intentionally bloated government bureaucracies.


        Deception is the strongest political force on the planet.

        1. anonymous

          I agree. I should ignore my own decades long experience living and working in Japan, the experiences of my Japanese family, our extended network of business and personal contacts, and listen to your imagination.

          Homelessness is too serious a problem in virtually all countries to be used as a rhetorical stick, so let’s just say there are more homeless people in Japan today than there were two decades ago. You present this development as proof positive of the inevitable collapse of capitalism, ignoring the fact that you can’t even find many hard-core Marxists outside North Korea willing to foist the inevitability nonsense on anyone over the age of fifteen.

          There are real problems with the Japanese financial system and I leave it to Yves and the better informed to elaborate on them. You’ll recall, however, that Yves has repeatedly referred to Japan the most economically egalitarian nation in the world, with a remarkably low-level of economic disparity. Which, to break it down for you, suggests that the so-called “rosy-picture” I present is the rule, not the exception. The standard of living in Japan remains extremely high, although that news will distress you no end.

          Our wonderful new house is the smallest of nine in our development, when we purchased just over a year ago. The same home fifty miles to the west sells for half the price; and sold twenty miles to the east in the center of Tokyo is double or more. That’s Japan’s economy in a nutshell. Wages and prices outside major urban centers are scaled down.

          Keeping the maximum number of people employed across Japan remains the number one priority of business and government.

          I could go on. I had lunch with an American banker friend last week who was downsized by an American firm operating in Japan last year who expressed considerable relief that he’d been forced from his job in Japan, rather than in the US because Japanese labor law provides workers with real protection from predatory employers. He expects to win a generous settlement. Ditto private and public health insurance, access to high-quality public education, even in remote areas.

          The large level of debt the Japanese government carries, btw, has made it extremely difficult for Japan to keep paying public pensions at a rate that provides the elderly with anything like the lifestyle I’ve described, if that pension is their only source of income. There is nothing like the level of income disparity you have elsewhere, however.

          Your general level of ignorance and willingness to wax eloquent about a place you clearly know very little about is really quite stunning.

          1. i on the ball patriot

            I’m happy for you and relieved to learn that I have been misinformed and that I am ignorant. I will try and be a little more perceptive in the future.

            Stupid me, I have always thought that increasing poverty and homelessness (which you admit is occurring in Japan) WAS a good measure of the economic health of a nation state and growing economic disparity in that nation state.

            For the record you put words in my mouth when you say;

            “You present this development as proof positive of the inevitable collapse of capitalism, ignoring the fact that you can’t even find many hard-core Marxists outside North Korea willing to foist the inevitability nonsense on anyone over the age of fifteen.”

            I never said that ‘capitalism’ was going to collapse. I don’t believe ‘capitalism’ exists anywhere on the planet. What does exist is a gangster cabal of global wealthy ruling elite who control nation states through their control over global central banks. ‘Capitalism’ is a deflective decoy fantasy scam that they use to mask their machinations. Go back and read my imaginary comments, and good luck with your future bond sales and the resultant effect you will soon see on those already thin pension benefits to the elderly.

            Deception is the strongest political force on the planet.

          2. anonymous

            The increase in the number of homeless is a reasonable indicator of the economic health of the people and the numbers you cite are of a population of 130 million. The increase you cite is almost meaningless.

            You may not be aware of the fact that your “global cabal” and “non-existent” capitalism is boilerplate 1870’s Marx et al, but that’s the sorry truth.

            If you don’t believe in progress, you haven’t been to a good dentist in the last forty years.

            Memo to chicken-little: sky not falling.

            Life is great!

      2. Patriot

        I’ve spent some time staying in Tokyo over the last 3 years. While things may be good for the older generation, among the younger folks I see more and more casual employment, and more and more people unable to get their career started. But maybe it’s just the circles I travel in.

        1. anonymous

          This is a fair assessment, I think. Before, virtually everybody got a job of some kind, even one or two days a month. Historically, being un-employed has been seen as a very bad thing. The people I know who just left jobs or are between jobs: spent the last month hiking the back-country of Viet Nam, spent the summer sailing the Indian Ocean, will visit Copenhagen and Germany next month.

          Young people definitely face major obstacles their parents did not. There is considerably less pressure on them to conform and strive for the job for life position. We have two kids in the Japanese public school system and no particular concerns about their prospects.

  7. Jim Haygood

    ‘When an economy is very slack, cheaper money is not going to induce much in the way of real economy activity.’

    Nope. But prior experience suggests that an asset price bubble can, like a few lines of cocaine, make a 98-pound weakling economy feel like an ersatz Superman.

    So, although Bernanke’s stuffing the bank reserves channel is useless in the absence of loan demand, it is creating a fantastic fixed income bubble. Thanks to price appreciation as yields drop, Pimco’s Total Return fund has delivered a sparkling 12.6% gain over the past 12 months, and so have many other fixed income investments.

    Now punters are buying the momentum. Grab a 30-year Treasury at 3.69%, let yields sink to 2.5% as the economy tips back into recession, et voila — you’ve got a 25% price gain; never mind about the crappy coupon. Put your mad money into long zeros, and you could double it.

    It ought to be stone fricking obvious that this is just the Nasdaq Bubble and the Housing Bubble all over again, now rotated into ‘government guaranteed’ securities. (Alarmingly, the more naive punters think the government has guaranteed that they can’t lose money.)

    It’s like Johnny Law’s assignats all over again. Inconveniently, though, the super-low yields which accompany bond bubbles carry a paradoxical deflationary message for many. So a perplexed Bernanke will keep stuffing the lending channel, like feeding a goose with a funnel, till an ‘inflationary flashover’ occurs and singes his silvery beard off. Stick a pair of bottle-lensed eyeglasses on him, and recoil in horror: it’s the return of Mr. Magoo!

    Bubble I: tech/telecom stocks (1995-2000)
    Bubble II: real estate (2001-2006)
    Bubble III: Treasury bonds (2007-2011?)

  8. anonymous

    Japan cleaned up the banks as quickly as they could given the circumstances, as I recall. Japanese banks did everything they could to avoid co-operating with regulatory efforts and ( I think ) the finance ministry was still trying to get an accurate picture of the health of the banks as late as 2000, according to a paper by the vice-minister, whose name I can’t recall. But that’s not my point.

    My point is that the principal reason the general population did not freak-out was because the over-riding sentiment of all concerned was to keep the maximum number of people employed while shutting down unprofitable and insolvent institutions. Which is precisely the opposite of the US approach.

    I defer absolutely to Yves and other experts on the financial issues addressed, but the social costs seem to me to be at least as important, not only because we’re talking about real people and their jobs, but also because of the negative feedback loops that start to kick once large numbers of people get dumped out of the workforce.

    I stand by my comments made elsewhere that the only thing that’s going to repair the US economy is regime change. I’d much prefer to have seen a bigger, more jobs oriented stimulus package, but that didn’t happen. Consumer confidence is going to tick with a bunch of fresh faces, at least for a moment. After that, it’s anyone’s guess. One thing is clear: nothing is going to get better with the current gang in charge.

  9. Jessica

    The enduring problem in Japan is zombie companies.
    Everything is stacked to disadvantage small and medium companies (and consumers) to the advantage of the largest companies. This was a good strategy for catch up. Since you know what you need to do before you start, you can use economies of size to scale up rapidly. But in industries in which you do not know what you need until you gradually figure out through feedback from the market, the dinosaurs stifle the innovation required. If the US played by Japanese rules, there would be no Google, no Cisco, no Microsoft, no Amazon.

    1. liberal

      …the dinosaurs stifle the innovation required. If the US played by Japanese rules, there would be no Google, no Cisco, no Microsoft, no Amazon.

      I don’t see how Microsoft fits into this reasoning. Sure, they started out small, but they themselves have innovated very little and turned into a suffocating monopoly themselves.

  10. Doc Zombie Whore Holiday

    “providing assistance to banks and their borrowers can be counterproductive”

    Bingo, don’t give the zombie whores ,more blow or dough — or if you do provide more blow, at least make sure the whores are more productive (and make sure they can prove to that the sugar daddy they have, is alive) …. gads, why give a zombie whore more blow ….. gads, zombie whores( ZW) are obviously worthless to any hard-working john, but in “our” case (as social workers) the zombie whores are taking in more cash from the social worker taxpayers that are giving more and more dough and helping window-dress the ZW’s to make it appear that these dead things have value as live whores …. when in fact, we all F’ing know the score. Hence, we need a score card to rate these whores and really understand the extent to which these ZW’s are being propped up and to wit, shake them down to see if they have any cash …. yah know, like would yah want yer retirement dough in the panties, pockets or purse of a ZW — or would yah be more realistic about this retarded sham and make sure that your last remaining pennies are tucked away out of harms way? Huh, what would yah do… where do you want your money to live, in a corpse dressed up like Bernanke or …. maybe some physical reality that you can see and believe in … what ever that is, but it sounds like a bar of gold or silver. Screw the ZW’s …. and all their fantasy BS.

  11. Tao Jonesing

    I guess I’m having a hard time understanding how quantitative easing advances the Fed’s mandate, which is “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”

    I don’t think propping up the bond and equity markets is what Congress meant by “stable prices,” nor do I see how QE can accomplish any of the stated goals “effectively.” QE takes the down out of “trickle down” economics (unless, of course, you’re really talking about who pays the bill instead of who benefits from the policy).

  12. rd

    In 2008, we needed to take actions necessary to prevent total uncontrolled collapse of the financial system which appeared to be a real danger. However, that should have been a short-term holding action to be followed by real reform over the subsequent couple of years. The financial sector needed to be stabilized to the point of avoiding collapse but not enough to let the good times roll again unless it was based on real lending.

    We have something resembling a reform bill, although it appears to have been watered down. It will be “interesting” to see how it actually performs over the next years or so since the reflation of financial assets is probably setting us up for another crisis or mini-crisis.

    This time around, financial institutions that are insolvent will need to be “resolved” using whatever tools that have been put into the financial reform bill. Until TBTFs are allowed to fail, we will not see stability.

    Unfortunately, I don’t believe that the Administration has the gumption to do what needs to be done.

  13. Nexus

    The real issue is that Bernanke appears to not understand deflation. Professor Keen in Australia has done some good analysis around this and points to Bernanke’s failure to recognize Fisher’s volt-face regarding equilibrium. There is ample evidence that QE will simply pour petrol on the debt fire and only benefit financial institutions in the short term and not the non backing sector. This will in turn deepen the debt crisis as the banks will carry on regardless.


    The Japanese experience points the need to clean up the banking sector (they did not nor has the US) and their stimulus like the US was too little tool late. An IMF paper examined 124 financial crisis and observed that QE has little positive impact – IMF Working Paper – Systemic Banking Crisis: A New Database.

  14. Mike in Tokyo Rogers

    Yves wrote; “This is an important conclusion, and is consistent with the warnings the Japanese gave to the US during the financial crisis, which were uncharacteristically blunt.”

    Perhaps the Japanese government did give these warnings but, as it always is with any bad behavior, it’s easier to tell someone else that they, “Shouldn’t do this,” or, “Shouldn’t do that…” But here we have the Japanese government again actually expressing in public that they will repeat the same behavior, so it matters not what these politicians say… They will do anything to kick the can down to road as there’s always an election just around the corner.

  15. Expat

    Um, yes, that is exactly what QE does. Why? Were you expecting something else?

    Seriously, can you point to anything done since the start of this bubble that was not designed to help the banks? Anyone? Anyone? Bueller? Anyone?

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