Thursday, October 02, 2008


Japan, Banks and Bailouts

Over at Japundit, I posted a little snippet on banks and bailouts. I wrote that while I did not understand the current banking collapse (no one does, my banking friends assure me which, let me tell you, does not reassure me), I do know that Japan underwent something similar in the 90s, and that it led to what is commonly referred to as the "lost decade." "Before the bubble . . .but then the bubble came . . ." my friends in Japan will say to me mournfully, aware that they missed out on Japan's materialistic heyday.

Here's what I wrote.
Examining the Swedish banking collapse and the Japanese banking collapse, the author draws the following conclusions.

RESOLUTION: The Japanese government recouped a sizable amount of its bailout funds by reselling collateral, most often land, and other assets. The abysmal times in Japan during the 1990s are now known as the “lost decade.” Even though the economy is better now, the Japan’s stock market still hasn’t returned to its peak before the bubble burst. And Japan still has about $9 billion worth of property held as collateral that needs to be sold.

LESSON FOR U.S.: Japan waited too long before resorting to a bailout using taxpayers’ money to write off the mountain of bad loans on banks’ balance sheets, experts say.

The Swedish government, claims the article, intervened quickly and as a result, the banking system recovered more quickly.

Regardless, I’m assuming (ahem, Mr. Pink, ahem) that we will begin to see a number of Japan-related articles in which the dangers of too much debt are examined and rexamined. Are any lessons applicable? Will anyone be smart enough to heed the lessons

I was distressed when the publisher of the site cautioned me from pursuing this story, as it touched on the subject of American politics, which is not allowed on Japundit. I felt that this was a shame since I fully expect the mainstream media to begin examining Japan's history with banks and debt and bailouts and it seems like an interesting subject for Japanophiles to discuss.

Well, the articles have begun. Here's one in the New York Times.

Just as in the U.S. today, most Japanese did not initially appreciate how devastating a banking crisis could be to the real economy. Banks and real estate tycoons in Japan were corrupt, profligate and unsympathetic figures, and no one wanted to help them. On corporate expense accounts, they sipped coffee with gold leaf and patronized “no-panties shabu-shabu” restaurants, which had mirrored floors and miniskirted waitresses.

In short, the businessmen involved were jerks. And, whether in Japan or the U.S., it’s challenging for politicians to frame a bailout with the slogan: Save the jerks!

Japanese politicians didn’t want to rescue such unpopular fat cats and didn’t see any emergency. So Japan’s economy slowly lost air, and the biggest losers were the small futon makers who couldn’t get credit and the farmers on remote islands who lost ferry service when the government eventually had to cut back on spending.

For those of you accustomed to bull markets, who think we’re sure to come out of this quickly, remember this: Japan’s main stock index is still less than one-third of its level of 19 years ago.

The anger at Wall Street and bankers aside, the message seems to be that we must bail out the fat cats. Ugh.

The New York Times article also contains this quote, referencing one of my huge intellectual crushes, Peter Drucker, the only person to whom I ever sent a fan letter (and he wrote back!)

Among the strongest critics of inflated executive pay have been Warren Buffett and the late management guru, Peter Drucker, who argued that C.E.O. salaries should peak at no more than 20 or 25 times those of the average worker. (Last year, C.E.O.’s got an average of 344 times the wages of the typical worker.)

The truth is that with the complicity of boards of directors, C.E.O.’s hijack shareholder wealth in ways that are unconscionable. As The Wall Street Journal reported in June, if Eugene Isenberg, the 78-year-old C.E.O. of Nabors Industries, were to drop dead one of these days, his estate would be entitled to a “severance payment” of at least $263 million — more than the firm’s first-quarter net earnings.

Of course, CEO pay in Japan has never been what it is in the US; I remember reading in the 80s (when we were afraid Japan would take over the world) that Japanese largess could never be what it is in the US; we are simply far less modest. Will we change? Will populist anger change this country for the better? It's hard to know. Incurable optimist that I am, I hope so.

Yes, Japan waited too long (until 2003) before resorting to a bailout using taxpayers’ money to write off the mountain of bad loans on banks’ balance sheets.

This financial crisis in the US is as same as what happened in Japan in 1990. People invested for the real estate or housing bonds in the hope that the house (land) prices would keep on increasing. But sometime they have to drop as that actually happened. And eventually only bad loans in the banks and securities firms were left.

You could only say, without rescue program, the problems of bad loans become worse with the time. Now at least the emergency financial bailout program to buy 700 billions dollars in troubled assets passed in the house of US congress and you could prevent an economic catastrophe. We hope this will be the beginning of world economic recovery.

I guess unless the finance capitalism that provides money games (money makes more money) will end, the things won't change.
I had no idea that Japan waited until 2003! Thanks for pointing out that very interesting fact. I knew that times had improved in Japan in the past few years, but I didn't know the bailout only recently happened.
Gee. Despite bailout, the world stock market plummet. It seems the financial contraction doesn't stop and we are approaching to the world financial crisis and deep recession.
Actually, Japan started resorting to a bailout using taxpayers’ money to write off bad loans on banks’ balance sheets in 1998 and that lasted until 2003. The financial aids were around 140 billion dollars. To date more than 70 % of them were paid back from the banks.

Anyway, we really hope that the financial crisis will be fixed soon in the US.
Well, so do we. But everyone seems very bewildered with not much of a clear sense of how to fix things. It's staggering.
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