Are We Turning Japanese Deliberately?
A disapproving Atrios quotes Bloomberg: “Treasury Secretary Timothy Geithner is betting that U.S. banks can do something their Japanese counterparts were unable to accomplish in that country’s “lost decade” of the 1990s: earn their way out of trouble.” Duncan remarks:
The econ-finance brain trust of this country spend years obsessing about the horrible Japanese mistakes. I guess, like Vietnam, those “lessons” weren’t actually learned.
Recently, however, I began to hear the amazing tale of Richard Koo whose forthcoming book apparently argues that though the Japanese policy response wasn’t perfect, it was actually much better than it’s usually given credit for. According to Koo, given the scale of the negative balance sheet shock, Japan actually did quite well. You can see a summary of his view here at Seeking Alpha and here from Paul Kedrosky.
Do I believe this? I’m not sure. But guess who’s on the jacket flap?
There will probably never be a last word on the Japanese financial catastrophe of the 1990s but Richard Koo’s book may be the most significant analysis ever published. Agree or disagree, any analyst of the current United States situation must consider Koo’s arguments. – Lawrence H. Summers
Summers was among those criticizing the Japanese in the 1990s, but maybe he’s changed his mind?
Meanwhile, it’s become conventional on the left to attack the administration as unduly in hoc to “banksters” who are sure to destroy us. But Koo’s argument is that we ought to spend less time worrying about the banks, and just accept that it will take years for the private sector to restore its balance sheets. In the interim what’s needed is massive and sustained deficit-financed public investment. This, it seems to me, is an argument progressives could find pretty congenial.
26 Responses to “Are We Turning Japanese Deliberately?”
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May 8th, 2009 at 1:48 pm
I really think so.
May 8th, 2009 at 1:51 pm
Yep, uh-huh, yeah and yes.
May 8th, 2009 at 2:05 pm
“But Koo’s argument is that we ought to spend less time worrying about the banks, and just accept that it will take years for the private sector to restore its balance sheets.”
The thing is that we only have to accept this if we accept the proposition that we can’t take the banks into temporary receivership.
And that’s not a proposition that should seem acceptable.
“In the interim what’s needed is massive and sustained deficit-financed public investment.”
Well, that’s precisely what the Japanese did. And a sane person wouldn’t call that a successful response to the economic crisis.
I’m all in favor of public investment. And now is a good time for it.
But I’m also in favor of curing the banking dysfunction that is the cancer at the center of our underperforming economy, and will remain the cancer at the center of our underperforming economy for the next decade if we proceed down the current path.
I don’t think getting a WPA program in exchange for a decade of lousy economic performance for is a decent trade-off.
May 8th, 2009 at 2:07 pm
I’m just going to note again I think this whole Sweden versus Japan thing is completely played out. For example, people seem to be forgetting that in addition to nationalizing some banks, Sweden also provided all sorts of blanket guarantees. That too was a form of letting banks “earn their way out of trouble”.
Anyway, Koo’s theory sounds interesting, and may contain elements of truth, but I’m not quite convinced yet it applies to our situation, in part because the rates banks are charging (measured by spreads) are still at unusually high levels. I guess we shall just have to see if firms start borrowing more once spreads come down to more typical levels.
May 8th, 2009 at 2:15 pm
Shorter Petey:
Only someone with a trust fund would write this post.
Nobody gives a shit what you think any more Petey. Your “trust fund scumbag” routine has put you into the Lonewacko “Amanda terkal Award blah blah blah” territory.
May 8th, 2009 at 2:18 pm
The odd thing is that Koo more or less anticipates and responds to all of Petey’s arguments, but Petey doesn’t bother dealing with Koo’s responses. In other words, Petey basically takes the conversation back a step with no apparent purpose.
May 8th, 2009 at 2:22 pm
IMHO Petey is right on.
Sweden made their banks write-down their assets BEFORE they guarenteed them.
May 8th, 2009 at 2:23 pm
I’m turning Japanese as I type this.
May 8th, 2009 at 2:25 pm
Goddamn radical hippies!
Only problem is that Koo, per your recitation, states “just accept that it will take years for the private sector to resore its balance sheets.”
It may be a bit problematic than the private sector is doing no such thing. Rather, the government supports the banks but has little to no control over their activities. So neither side is sorting out the mess, but instead acting as mutually enabling addicts – strung out on the status quo. So, just waiting on the private sector is pretty moot.
But pretending otherwise is always a good opportunity to burnish one’s centrist credentials, eh.
May 8th, 2009 at 2:31 pm
Only problem is that Koo, per your recitation, states “just accept that it will take years for the private sector to resore its balance sheets.” It may be a bit problematic than the private sector is doing no such thing.
By “private sector”, Koo is referring here to potential borrowers. Are you sure potential borrowers are not restoring their balance sheets (aka, reducing their debt load)? Because I know individuals are, and it wouldn’t surprise me if firms were as well.
May 8th, 2009 at 2:33 pm
Petey:
blah, blah, blah, etc.
I’m just amazed that Elizabeth Edwards actually knew about her husband’s affair and still campaigned for him. And cheating on your wife who has cancer is just wrong.
I blame morally lax Democrats who let Bill Clinton get away with it (”it’s just sex”) which set the bar lower and enabled John Edwards to act the way he did. (”hey Clinton go away with it”)
May 8th, 2009 at 2:41 pm
For the umptillianth time. The situation that we’re in is not, I repeat, not, anything like Japan’s or Sweden’s experience.
Anyone who compares the two is either:
An academic with little to no financial/banking experience.
Or a hack.
Our system (especially with respect to societal norms) is nothing like Japan’s was.
Moreover, in terms of credit, the institutions available to US banks is far, far more diverse than Japan’s was (where nearly all of the credit was wrapped up in their banking sector).
Could we please, please, stop talking about things that we know next to nothing about?
May 8th, 2009 at 2:45 pm
Anyone who compares the two is either: An academic with little to no financial/banking experience. Or a hack.
So according to this rule, the only people allowed to make any kind of analysis of the financial sector are people in the financial sector. How terribly convenient for them.
Petey’s right on this one, and Yglesias looks increasingly like he’s grasping at straws to justify an incredibly wrongheaded policy.
May 8th, 2009 at 2:51 pm
DTM:
Im not really sure borrowers are capable of repairing their debt load at his time. Im sure they want to, but I think a centerpiece of repairing those balance sheets, at least from the firm’s prospective, requires a solvent banking apparatus.
For the individual, I am not so sure. When firms decelerate their debt burden, this seems like recipe to reduce expenditures for employees – further eroding the labor market. In addition, the American employment system is not nearly remenurative for individuals to “restore their balance sheets.”
For a long time we substituted credit for a decent wage, and until we repair the whole in our pocketbooks, you may be able to “balance your sheet” but others won’t.
May 8th, 2009 at 2:54 pm
“massive and sustained deficit-financed public investment”
It would have been politically a lot more realistic to shut down insolvent banks.
May 8th, 2009 at 2:54 pm
In the interim what’s needed is massive and sustained deficit-financed public investment.
C’mon Matt. Everybody knows deficits became a deadly threat to the survival of the republic on January 21, 2009.
May 8th, 2009 at 2:55 pm
This is an unfair characterization.
The argument on the left is POLICY-DRIVEN: that reform is necessary, in particular, that antitrust laws must be enforced, along with reinstatement of some version of Glass-Steagall, to eliminate too-big-to-fail — and now insolvent — “banks” from destroying the market economy. Without such reforms, regulation cannot work — even if there is a one-to-one relationship between bankers and regulators.
The current “policy” of BHO, TG, and LS is NOT “progressive” in any way, shape, or form. It is timid, defensive, static and conservative, in the worst sense of that term. It is exactly what we would have gotten under Bush.
So drop the “left” vs. “progressive” bullshit, please.
May 8th, 2009 at 2:56 pm
strasmangelo jones,
No…Anyone is allowed to analyze, moreover, anyone is entitled to make a shitty analysis. But that doesn’t mean that one should ignore that terrible analysis…especially when it seems to be coming from the same groups of people over and over again.
If I said that people that tell me the sky is yellow are either:
a.) Blind
b.) Morons
Does that mean that no one is entitled to tell me that the sky is yellow? No. It’s just an explanation as to why people might tell me that the sky is yellow.
May 8th, 2009 at 3:00 pm
Well, that’s precisely what the Japanese did. And a sane person wouldn’t call that a successful response to the economic crisis.
Petey: Although I think you’re mostly correct, it has to be pointed out that this line of reasoning can be taken too far, as well. I’m too busy to look google up precise numbers, but over the course of the 90s, Japan’s economy actually managed to grow (albeit very slowly). I’m guessing in the 1.5%/range per annum. Combine that with Japan’s very slow population growth, and with the fact that Japan started off the 90s as a country that was already quite rich, and one could reasonably conclude that Japan managed its crisis satisfactorily, and grew ever richer. It even got some amazing infrastructure out of the deal, as well (’course it got lots of white elephants, too). Moreover, the vast bulk of the interest payments the Japanese government has to make on all that Keynesian public debt flows into the bank accounts of its own citizens. It really could have been a lot worse.
May 8th, 2009 at 3:06 pm
Im not really sure borrowers are capable of repairing their debt load at his time. Im sure they want to, but I think a centerpiece of repairing those balance sheets, at least from the firm’s prospective, requires a solvent banking apparatus.
Why? The standard approach is to cut operating costs (e.g., fire people), cancel a bunch of planned capital improvements, and use the cash you just freed up to pay down debt. What does the solvency of the banking system have to do with that?
When firms decelerate their debt burden, this seems like recipe to reduce expenditures for employees – further eroding the labor market. In addition, the American employment system is not nearly remenurative for individuals to “restore their balance sheets.”
Depends on who you are talking about. If you have just been fired or are living paycheck to paycheck, maybe not. But many Americans are still doing a bit better than that, and they are cutting their costs and paying down debt–see the personal savings rate:
http://www.bea.gov/briefrm/saving.htm
For a long time we substituted credit for a decent wage, and until we repair the whole in our pocketbooks, you may be able to “balance your sheet” but others won’t.
That is a paradox. By “repair the hole in our pocketbooks” you apparently mean the same thing as improving our balance sheets (reducing our debt load). So, you are basically saying we can’t do X until we do X. Again, the upshot is that those of us who can do X are doing X.
And back to Koo, that is what he is claiming is going to happen with firms: those that can do X will do so. So if on net individual consumers are paying down debt, and on net firms are paying down debt, then fixing the banks isn’t going to save us from a deflationary scenario. For that we will need someone besides individuals and firms to be increasing spending . . . hence the need for public spending.
May 8th, 2009 at 3:26 pm
It depends what you mean by private investment. The $850 billion combined Bush Obama stimulus plans or the $11 trillion and counting prop job on financial assets.
It’s going to be a real eye opener to most when the percentage of profits from the financial sector busts right through the 50% line.
Geither says banks are going to earn they way out of trouble. He doesn’t mention that the huge banks are going to do it by trading and doing the vulture thing on the designated losers. Last quarters big earnings by GS, BAC and the rest were exclusively from trading and accounting.
The Japanese could be said to have failed in that they never re flated their assets but their problem there was that so much of it was real estate which got to far more absurd levels than our bubble. We will have that problem too but as the stock market is showing we are expert at inflating other assets. It’s what we have spent 30 years perfecting after all.
DOW 30,000 and 20% unemployment is my outlook.
May 8th, 2009 at 3:54 pm
“Combine that with Japan’s very slow population growth, and with the fact that Japan started off the 90s as a country that was already quite rich, and one could reasonably conclude that Japan managed its crisis satisfactorily, and grew ever richer. It even got some amazing infrastructure out of the deal, as well”
Point taken.
But America with its balance of payments issues and demographic issues really can’t afford the kind of multi-decade vacation that Japan took.
Japan’s lost decade was a farce. Ours would be a tragedy.
May 8th, 2009 at 4:05 pm
‘Accounting’ is a rather generous way of saying ‘we didn’t count December’.
May 8th, 2009 at 4:10 pm
“Japan’s lost decade was a farce. Ours would be a tragedy.”
1982-1983 in the U.S.: banks were insolvent, were allowed to earn their way out of trouble, they did so, and no “Lost Decade” resulted.
1991 in the U.S.: banks were poorly capitalized, were allowed to earn their way out of trouble, did so, and in a few years the economy was booming. Again, no “Lost Decade.”
So why do you think the Japanese experience is more relevant than our own recent history with banking crises?
May 8th, 2009 at 4:19 pm
Sentence 1.
“the conventional on the left to attack the administration as unduly in hoc to “banksters”
Sentence 2.
“In the interim what’s needed is massive and sustained deficit-financed public investment.”
Sentence 1 and 2 directly contradict each other since we need to coddle the banks to manage the government debt. I mean, Nancy gave in to Paulson on sentence 1 precisely so she could support sentence 2.
May 8th, 2009 at 4:28 pm
For progressive readers, here is the actual statement of Fanny Mae. Fanny, now a completely nationalized mortgage lender explains in clarity how it is impossible to satisfy Yglesias on sentence 1 while supporting sentence 2. Progressive institutions telling progressives exactly how contradictory their progressive argument is.
“These objectives create conflicts in strategic and day-to-day decision-making that could lead to less than optimal outcomes for some or all of these objectives. For example, limiting the amount of funds Treasury must invest in us under the senior preferred stock purchase agreement in order to eliminate a net worth deficit could require us to constrain some of our business activities, including activities targeted at providing liquidity, stability and affordability to the mortgage market. Conversely, to the extent we expand our efforts to assist the mortgage market, our financial results are likely to suffer, at least in the short term, which will increase the amount of funds that Treasury is required to provide to us and further limit our ability to return to long-term profitability. We regularly consult with and receive direction from our conservator on how to balance our objectives.”