<!DOCTYPE HTML PUBLIC "-//W3C//DTD HTML 4.0 Transitional//EN"> <HTML> Over on LBO-talk, Lou Proyect has accused Doug Henwood of not noticing that there is a capitalist crisis, and I have bet Max Sawicky $1000 to a kilo of dried roubles that the Dow will crash to 3000 within a year. Earlier this week, Doug Henwood apparently argued on his radio show that it is 'scaremongering' to suggest that Japan's bad debts equal a trillion dollars. But today the FT estimates that the true Japanese bad debt problem is even worse, and at $1.21 bn is now approaching 30% of GDP. And the FT takes such a serious view of the banking meltdown in Japan that it has only one recommendation to make: Japan's banking system must be nationalised. Meanwhile Japan's stock exchange celebrated the arrival Thursday of Gordon Brown, Britain's Chancellor of the Exchequer by losing another 2% of its value. Brown has gone to Tokyo to give advice, in delicious revenge for earlier humiliation as British export industries from motorcycles to cars to TV sets were decimated down the postwar decades; the Nikkei now stands  at a new 12-year  low of 13,859.14 (and the word in Wall Street always was that the entire Japanese financial system would collapse if the Nikkei fell below 14k). In further developments, the new Primakov govt offered dismayed western bankers 4c on the dollar to redeem its T-Bills; and in Brazil yesterday, trading on the  bourse was suspended when share prices fell by  more than 10 per cent. Pundits expect Brazil to be the next victim of financial contagion. Since Brazil accounts for 40% of Lat Am GDP it will be like a chain sliding off the deck; all the other links will follow. Coffee anyone? Mark J.]   -------------------------- [Financial Times Frightday 18 September 1998] Bailing out Japan's banks The political deadlock over the future of the Long Term Credit Bank of Japan saw Japan's top officials meeting into the early hours last night in an attempt to reach a decision before the weekend. But the approach they are taking is fundamentally flawed. Although the ruling LDP party has been reluctantly edging toward the opposition's plans to nationalise the weakest banks, it has so far appeared as keen as ever to inject public funds to save them. But as well as being very expensive, this would leave the Japanese banking system as overcrowded and unprofitable as ever. The opposition's proposals sound more sensible. They suggest that the weaker banks should be nationalised, then wound down, so removing excess capacity and giving the other banks breathing space to rebuild their balance sheets. This could work, if Japan's banks could be neatly separated into the sound and the unsound. The problem is that as Japan's politicians have dithered, the problems in the banking sector have worsened to a point where the entire banking system has been severely weakened. The rating agency Standard & Poor's earlier this week estimated that the banks' problem loans could total as much as ¥151,370bn ($1,121bn) - 30 per cent of gross domestic product. In such a vulnerable banking system, the closure of the weakest banks could have devastating knock-on effects. The Japan premium would rocket, leaving many banks with very serious liquidity problems, and worsening the credit crunch. With the whole banking system in difficulties, a piecemeal approach could be very damaging. One option would be to inject public money into those banks worth saving, at the same time as winding down those that are insolvent. The problem is that the bailout would have to be massive; and with the banks still privately owned, the benefit would accrue to the shareholders. This would amount to a huge transfer of funds from government to shareholders, which would surely be politically unjustifiable. The unpalatable truth is that if the Japanese government really wants to rationalise its banking sector, while avoiding the risk of a total credit crunch, it has to carry out a widescale nationalisation programme, followed by closure of the worst banks, and recapitalisation and subsequent flotation of those that remain. This would impose appropriate losses on shareholders, since the government would acquire ownership rights. It would also ensure that the banking system continued to function during the clean-up process. It would be a radical move; but it may be the only way for Japan to extricate itself from a desperate situation.                 © Copyright the Financial Times Limited1998   -- <A HREF="http://www.netcomuk.co.uk/~jones_m/frontline">http://www.netcomuk.co.uk/~jones_m/frontline</A>  </HTML>