Krugman on banks: We make the same mistake Japan made

[johan helge]

Krugman quotes Adam Posen, an expert on Japan's lost decade (http://krugman.blogs.nytimes.com/2009/02/25/turning-japanese/):

The guarantees that the US government has already extended to the banks in the last year, and the insufficient (though large) capital injections without government control or adequate conditionality also already given under TARP, closely mimic those given by the Japanese government in the mid-1990s to keep their major banks open without having to recognize specific failures and losses. The result then, and the emerging result now, is that the banks’ top management simply burns through that cash, socializing the losses for the taxpayer, grabbing any rare gains for management payouts or shareholder dividends, and ending up still undercapitalized. Pretending that distressed assets are worth more than they actually are today for regulatory purposes persuades no one besides the regulators, and just gives the banks more taxpayer money to spend down, and more time to impose a credit crunch.

These kind of half-measures to keep banks open rather than disciplined are precisely what the Japanese Ministry of Finance engaged in from their bubble’s burst in 1992 through to 1998 …

[mmonk]

1. Yes, this is a problem I see and I see markets still floundering

over the thought. Americans, who have been used to being spoiled, won't put up with a lost decade and the situation could give rise to another rightwing government if we aren't careful.

[Art_from_Ark]

2. It wasn't so much the taxpayer who was footing the bill for the Japanese bailout

It was the savers who paid for it, with greatly reduced interest rates on bank account-- during the worst of it, a half-year's interest on a $30,000 deposit would barely be enough to buy a can of soda from a Coke machine.
Borrowers also paid for it, with higher rates on loans, and people who used bank services were socked with increasing rates.

[mmonk]

3. There is the problem of the zombie banks which we don't know

what their real balance sheets look like. Pumping dollars whether tax payer dollars or fed money could have a negative effect if they are insolvent.

[BootinUp]

4. Delay tactics

Send out the Fed Chairman who does not directly represent the Admin, to quell the rickus, while they work behind the scenes to analyze and gather more data and see how the economy goes a little longer. They will not make this decision quickly enough for some, but they are leaving their options open still.

[AndyA]

5. What else could we expect from the Bush Administration but to follow a failed policy?

Do they need to have "FAILURE" stamped on their foreheads?

I would have expected nothing less than for Bushco to walk down the same path of failure. The money needs to trickle UP, not down. Struggling families will spend every penny given them, which would keep them in their homes, and put money into the banking system and economy as well, because they WILL SPEND IT.

Rich people, it goes in a trust fund or sock drawer for another time. It doesn't circulate, it does nothing. And we're seeing the results of that right now.

Investigations need to happen. Charges need to be filed. People responsible for this mess must be prosecuted, be forced to liquidate everything they own, then go to jail. That, and that alone, will deter anyone else with a wise idea in the future.

[uponit7771]

6. Obama admin has mentioned some of the banks failing, that would be a good thing

[mmonk]

7. It would also be a good idea to package the bad debt

under one bank meant to be insolvent thus freeing up the credit among the others and providing some stability, transparency, and oversight.

[high density]

8. I have to assume that Obama's financial team is well aware of what went on in Japan

Just like I'm sure the defense people know the history of Afghanistan. But there are lots of people that are assuming these people have no sense of the history. It seems like we're closer to the start of this banking crisis than the end of it, and there are still a lot of decisions left to be made.

I am not going to blame this administration for the sloppy TARP legislation. That was one of Bush's final screwups for us all to live with. I do think it was better than doing nothing.