The United States and Europe have committed a lot of money to rescuing ailing banks to date. Japan’s veterans have just two words of advice: More and Faster.
The Japanese have experience as they endured a decade of economic stagnation in the 1990’s, because their banks struggled under crippling debt, and successive governments wasted trillions of yen on half measures to restore them.
In 2003 the Japanese government finally took actions that led to a recovery: forcing major banks to submit to merciless audits and declare their bad debts; spending two trillion yen, or US$22.23B at today’s rates. Thus effectively nationalizing a major bank at the expense of shareholders; and allowing weaker banks to fail.
But by the time that went into effect the Nikkei 225 stock index dropped by about 75% from its highs. Prices for real estate ultimately fell for 15 consecutive years, and public debt grew to exceed gross domestic product as deflation took hold. Some scholars of the Japanese debacle see the USA heading to a similar fate.
“I thought America had studied Japan’s failures,” said Hirofumi Gomi, a top official at the Japanese Financial Services Agency during the crisis. “Why is it making the same mistakes?”
Some US critics of the plan announced last week by US Treasury Secretary Timothy Geithner said it lacked details. Experts on Japan found it timid at best, especially given the size of the banking crisis the Obama administration faces.
“I think they know how big it is, but they don’t want to say how big it is,” said John Makin, an economist at the American Enterprise Institute, referring to administration officials. “It’s so big they can’t acknowledge it.”He added: “The lesson from Japan in the 1990s was that they should have stepped up and nationalized the banks.”
Instead, the Japanese first tried many of the same remedies that the administration of President George W. Bush tried and the administration of President Barack Obama is trying, i.e., low interest rates, fiscal stimulus and ineffective cash infusions, among other things.
The Japanese also tried to tap private capital to buy some of the bad assets from banks, as Geithner proposed.
One of the reasons Japan was so timid was fear of public outrage, which grew with each act of the bailout, but the Japanese experience shows that resolving the mess will require a firm government hand and will be extremely expensive. Delay in doing it now will only cause the cost to soar, and the bank rescue will determine the fate of the wider US economy. While President Obama has prioritized his stimulus plan, no stimulus is likely to succeed unless the banking sector is repaired, and the United States probably will not be able to count on a growing demand for its products as the global economy worsens. A further lesson is that the bank rescue will determine the fate of the wider economy. While Obama has prioritized his stimulus plan, no stimulus is likely to succeed unless the banking sector is repaired.
“The way things are going right now the U.S. taxpayers’ burden will keep going up and up.” said Takeo Hoshi, an economics professor at the University of California at San Diego.
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