> Seth also noted the crucial difference between the
> Nordic case and ours, but just how like Japan then is
> the US now? Political economy-wise, I mean.
==============================
Here's one analysis:
Japan's 'lost decade' offers dire pointers for the Fed By Gillian Tett and Krishna Guha Financial Times March 30 2008
A decade ago, senior American officials regularly travelled to Tokyo to deliver sermons on how to handle a banking crisis. Back in 1998, Japan was facing painful financial upheaval and economic stagnation in the wake of an asset price crash.
Many Washington and Wall Street gurus were convinced they knew how to fix this mess - partly because America had recently experienced its own banking crisis at the end of the 1980s, centred around savings and loans institutions. "People like Larry Summers [then US Treasury secretary] would fly over and say "do this!", recalls one senior Japanese financial official. "They kept telling us to use public money for the banks."
These days, the tables have turned with a vengeance. In recent months, the Tokyo markets have been a relative oasis of calm amid the global credit woes. America has been beset by full-scale banking turmoil, culminating in the rescue of Bear Stearns.
Most Japanese officials are far too polite to crow publicly about the reversal of fortunes. But, in private, wry smiles abound - and some are starting to take a once-unimaginable step: to offer the US a little advice themselves.
"It is essential to understand that given Japan's lesson, public fund injection [into the financial sector] is unavoidable," Yoshimi Watanabe, minister for financial policy and administrative reform, recently told the Financial Times, adding that although it was "very difficult for Japan to convey such a message to a foreign government ... Japan could, for example, convey - through the G7 [industrialised countries' finance ministers] or central bank governors' meeting - Japan's lesson."
Exactly how Washington might respond to this advice remains unclear. By a quirk of history, Ben Bernanke, who as US Federal Reserve chairman is in the eye of the storm, is an acknowledged expert on the Japanese crisis: he was also among those who travelled to Japan as a Fed governor to offer advice on how to fight back with unorthodox monetary policy. Timothy Geithner, the head of the New York Fed, is also deeply familiar with Japanese financial lessons, having lived in Tokyo in the 1990s before serving in the US Treasury's international team.
These men, along with other American economists, see significant differences between the current US problems and those that beset Japan. The US is not plagued by deflation, which created a "debt-deflation" trap in Japan, in which the real value of debts increased as prices fell.
The scale of the US problem also appears smaller in proportion to the size of the economy, not least because the securitisation of mortgage loans spread credit losses around the world.
"The cost of the losses in the US economy will be much smaller than they have been in Japan," says Ed Lincoln, a US economics expert on Japan.
Yet US policymakers also recognise that there are similarities between the crises. Most notably, the current credit crisis - as in Japan - is not just centred on one bank; instead it reflects a loss of confidence in the system.
In practical terms, the Japanese experience already appears to be shaping US policy in several ways - in terms of showing possible solutions as well as offering examples of what not to do. US economic policymakers believe Japan's lost decade was not the inevitable result of an asset price crash but the consequence of policy mistakes in the aftermath of that crash. They are determined to avoid repeating this error. As a result, US regulators are insisting that Wall Street banks come clean about losses more quickly than happened in Japan. "Japan dawdled for years ... but the US has moved much faster," says Robert Feldman, chief Japan economist at Morgan Stanley.
The aggressive mark-to-market accounting regime in the US forces both banks and policymakers to confront problems rapidly rather than let them fester. The Japanese saga appears to have encouraged the US to rescue Bear Stearns before it collapsed, on the idea that its failure would have had devastating spillover effects.
"The US has traditionally felt that if a financial institution was broken it should be sold or liquidated," says Timothy Ryan, former vice-chairman of JPMorgan. "Now it seems that the government believes that some form of open bank assistance may be the least-cost resolution - I think they're right."
However, the big question now is the one Mr Watanabe raised: whether the US will go a step further and intervene with public funds to prop up the financial system. Many Japanese officials are now quietly convinced that this has become inevitable - by directly rescuing banks or purchasing troubled mortgage assets or both.
However, this concept remains highly controversial in Washington. US officials are not yet convinced that the economic outlook is bleak enough to justify outright use of public funds. The US can use government-sponsored institutions, such as Fannie Mae or the Federal Home Loan Banks, as a "back-door" channel to the credit market and to the banks, without the need for explicitly taxpayer-funded intervention.
In general, the US political system is much more biased towards action than Japan's consensus-based system. But while senior Democrats in the US Congress are increasingly advocating more public intervention, the White House remains firmly opposed to the outright use of public funds. "There is no way that this current administration can sign up to a bail-out of the banks - I just don't think that is going to happen," says one senior Wall Street figure.
To some Japanese ears, this invokes a dangerous sense of déjà vu. After all, they point out, when financial institutions started to collapse in Japan in 1994, politicians in Tokyo were equally opposed to using public funds. As a result the Bank of Japan used its own, separate balance sheet to rescue two banks. This, however, later left the central bank shouldering losses.
By 1998, the banking problems had swelled to a point where the government finally recognised the need for a bail-out fund. Yet this was repeatedly delayed by political squabbling. It was not until 1999 - five years after the crisis started - that Tokyo produced a Y60,000bn package earmarked for steps such as the purchase of bank preference shares.
This was big enough to allay concern - although ironically, only a fraction of this money was ever used and much of the cash deployed was later recouped. "Our experience shows that waiting does not help," says one senior Japanese official. "You have to explain to politicians why you need to act."
But, for the moment, Washington is resisting this conclusion, even though the Fed believes that taxpayer-funded intervention could be justified as a last resort in some circumstances. When Mr Watanabe meets his US counterparts at next month's Group of Seven gathering, in other words, it could provoke some lively debate; almost as lively, in fact, as the conversations that occurred at the G7 back in 1998.