About not turning Japanese
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Submitted by lambert on Fri, 09/12/2008 - 9:41am
RGE Monitor has a summary of what the money people think:
Key lessons: 1) government should not save all banks; encourage exit of weakest players; 2) Swift resolution of bad debt overhang a la Brady Bond initiative or Resolution Trust Corporation (RTC) is key.
PIMCO on differences: 1) Unlike the U.S., Japan is a creditor nation and does not rely on overseas financing, so its bad debt situation was an internal problem with little potential spillover; 2) Japan’s bad debt problem on a cumulative basis amounted to a whopping 25–30% of the nation’s GDP, whereas the subprime problem is an estimated 5–10% of U.S. GDP. 3) Japan's bad debt problem stemmed from commercial real estate and excessive corporate debt--> in U.S. the debt structure is more complex and structured. Scholtes/Mackenzie, Sep 11: After BearStearns and GSEs, LEH and WaMu show that a systemic solution is required along the lines of a government-sponsored Resolution Trust Corporation (RTC) in order to ring-fence troubled assets, restructure them with a haircut, and sell them on over time while retaining any upside. Luigi Spaventa: Central banks intervening directly in the RMBS market is not necessary. Instead issue government-backed Brady bond-like securities at a discount in exchange for toxic waste on banks' balance sheets. Bernanke: Reasosns for Japan's deflation after bank crisis are twofold: 1) structurally less flexible economy than the U.S.; 2) bickering authorities prevented decisive and early action towards resolving the bank crisis. Unicredit: Lessons from past crises: "Ultimately, tax funded bailouts may be unavoidable: Governments often must set up companies, which –equipped with wideranging powers and an experienced management– assume, manage and if necessary completely liquidate non-performing assets." --> e.g. Resolution Trust Co. (RTC) in U.S. (1989), loss recognition and government bail-out package in Japan under Prompt Corrective Action Plan (1998); Sweden's very successful government-owned Asset Management Companies (AMC) created to mange the disposal of bad loans and real estate assets (1993/4) Carlson (Fed Board): Many of the banks that failed during the 1930s panics appear to have been at least as financially sound as banks that were able to use alternative resolution strategies. This result supports the idea that the disruptions caused by the banking panics may have exacerbated the economic downturn.
I like the point on swift resolution.
Seems like this thing's been going on... Well, as long as the election. And yet this thing's never even become a political issue -- or, should I say, an issue in electoral politics. Odd, that. Or not.
NOTE I say "this thing" because there doens't really seem to be a name for, well, it. That's odd, too. Or not.
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Comments
2 followups
1) Quick resolution requires a thorough and honest accounting. As you/Roubini point out, one of the differences between this bout of bad debt and previous ones is that this time it's largely securitized. My sense is that investors don't feel like banks/funds are accurately and thoroughly disclosing all of their bad debt. Until that happens, it's hard to ask anyone (including the taxpayer) to purchase bad debt at a "discount", since we have no idea what the appropriate discount should be.
2) More needs to be done to stabilize the housing market. All of the MBS/CDO are totally contingent, obviously, on the credit quality of mortgage payments. If house prices continue to fall, the economy continues to worsen, and defaults continue to rise, we'll have another round of writedowns, which will destroy any fragile resolution we might be able to achieve. Back in the 1930s, the Reconstruction Finance Corporation actually bought out mortgages at a discount, and refinanced them. They had huge scale and were singlehandedly responsible for setting a floor on the housing price decline in this country. The Dodd/Frank "Hope for Homeowners" program (which now appears on shaky ground, given that it was supposed to be financed by Fannie/Freddie) and the actions of FDIC in managing IndyMac's portfolio are smaller versions of the RFC's action. If things continue to deteriorate, we may need more scale, and we might have to contemplate something much bigger.
In a nutshell, all signs point to a (at least temporary) cessation of the "free markets will solve all woes" dogma. Big government solutions and intervention are going to occur sooner or later. Sooner may mean less disruption for the average American citizen. But later seems more likely, given the market bias of both McCain and Obama.