Fed cuts rates; crisis over?

boddhisatva kbevans at panix.com
Sat Oct 17 21:53:26 PDT 1998

C. Dennis,

While it's true that the Japanese have almost a third of the saved money in the world, it's also true that between 92% and 96% of those deposits (at least the ones in banks) have been loaned against, creating as much as 1 trillion dollars in bad debt. It's not as if the Japanese can simply take that cash out of the banks and make themselves whole. It's also true that, at present interest rates, there is no real market for Japanese sovereign debt outside Japan. Moreover, Japanese banks are made to pay a premium when they borrow. This spring the Japanese dropped nearly 10% of their foreign currency reserves into the forex markets propping up the yen and now the BOJ is lending those reserves directly to Japanese banks. People keep saying the crisis is coming to an end in Japan and still nobody, not even the government, has gotten a look at the books of the bad banks.

I think that when Japan gets it together there will be a cash party. I think it's also a little premature to get excited about how well they're doing when they have yet to do anything about a problem they have yet to reveal the actual dimensions of.

Earlier this year you trounced me in a little ideologically-based stock-picking contest. The main reason I got beat so bad is that I had no idea of the kind of speculative exposure American financial institutions had on their comparatively tightly regulated and market-rationalized books. I'd say that betting the Japanese have got it all sussed is virtually guaranteed to fail. We don't even have any idea of their exposure. What are the numbers on Japan's exposure to Indonesia, etc.? Remember that wasn't hedge funds lending there, that was big banks - the backbone of the financial system. Nobody, to my knowledge, has any firm numbers on Japanese losses in the rest of East Asia. You wanna bet they're throwing some serious money at East Asia. It very well may be they have no choice. If their borrowers go under, what then?

Again, I think the developments in Japan are long-term positive. I'm happy to see them throwing money around. It would be a lot better if the world had a better idea exactly why they were throwing that money around and whether it might reasonably be expected to be paid back.


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