The
following is the presentation at the Schiller Institute Conference in Germany on
Nov. 23-24 by Japan's Daisuke Kotegawa, now
the Research Director with the Canon Institute for Global Studies in Tokyo. He
is the former
Executive Director for Japan at the IMF, and a former official with Japan's
Ministry of Finance. He contrasts his own handling of the bursting of the
speculative bubble in Japan in the 1990s with that of the US over the past five
years since the 2007-8 collapse. I read his speech at the conference. I will
send out my own speech later. Mike Billington
Presentation
of Daisuke Kotegawa:
1.
I
was in charge of the restoration of the Japanese economy in the late 1990s and
early 2000s. Among others I was in charge of the liquidation of Sanyo Securities
and Yamaichi Securities in 1997, partial nationalization of Long Term Credit
Bank and Nippon Credit Bank in 1998 and the establishment of the Industrial
Revitalization Corporation of Japan in 2003. In this course, we were targets of
criticism not only from domestic voters but also from international opinion
leaders for mismanagement of the Japanese financial sector. Several
staff of the supervisory authorities, including the Ministry of Finance and the
Bank of Japan, were arrested and found guilty. Some of them committed suicide,
including my friends. From
this background it is quite easy for me to predict what will come next in the
ongoing financial crisis, because it really follows the suit of the crisis I
experienced in Japan 10 years ago—an unwelcome de-ja-vu.
2.
First,
it is essential to identify those who are responsible for this crisis. It is
investment bankers in the Anglo-Saxon countries who were indulging in high-risk
gambling types of trading, and created a bubble. It is quite awkward to see that
nobody has been arrested who gained from this bubble. Almost all
board members of liquidated or partially nationalized financial institutions
during the Japanese financial crisis in 1997 and 1998, were arrested and prosecuted.
3.
The
main structural cause of the financial bubble in the United States and Europe
from 2002 to 2007 was the complete abolishment of the Glass-Steagall Act in
February 1999. It was abolished under the leadership of Treasury Secretary
Lawrence Summers during the process of liberalizing financial markets in the
late 20th century. Glass Steagall was enacted in 1933 in order to divide the
business of banking and securities in light of the tragic experiences of the
Great Depression. Surplus liquidity created by an extended period of lax
monetary policy in the first decade of the 21st century under the auspices of
the Federal Reserve Chairman Greenspan, fueled a so-called money game by
investment banks, which was inconsistent with the laws of real demand.
4.
Then
there was a serious mistakes committed by governments of the United States and
the United Kingdom at the liquidation of Lehman Brothers. When Yamaichi
Securities closed in November 1997, the Japanese government allowed the
liquidation of Yamaichi only after all cross-border transactions had been
unwound. The main purpose of this was to not let the closure of Yamaichi affect
overseas financial institutions and drag Japan into the epicenter of a world
depression. This was not the case for the
liquidation of Lehman Brothers. Lehman went bankrupt
without unwinding its huge volume of cross-border transactions. This had
an extraordinarily contagious effect on the world financial system, triggered a
world depression comparable to the Great Depression before the Second World
War. Liquidating Lehman only after all
foreign transactions had been unwound could have averted a worldwide
crisis.
5.
The
next problem involves the process of bailing out financial institutions. US
authorities bailed out banks by injecting public money in order to defend the
financial system. In light of our experience in Japan, there are three problems
with regard to the modality of the bailout in the United States.
(i) The balance sheets of all major financial institutions were not rigidly examined by any official authority, using mark-to-market accounting;
(ii) The amount of public funds necessary to completely dispose of non-performing loans in each institution were not clearly identified;
(iii) Each institution did not dispose of all non-performing loans, making it vague to market investors whether or not non-performing loans had been left on the balance sheets.
(i) The balance sheets of all major financial institutions were not rigidly examined by any official authority, using mark-to-market accounting;
(ii) The amount of public funds necessary to completely dispose of non-performing loans in each institution were not clearly identified;
(iii) Each institution did not dispose of all non-performing loans, making it vague to market investors whether or not non-performing loans had been left on the balance sheets.
6. The
mark-to-market accounting rule was frozen as a result of pressure by the US
Congress. The method of examining balance sheets of major financial institutions
has not been stringent, unlike in Japan.
7. All major financial institutions avoided
liquidation except Lehman Brothers, but they were kept intact through a bailout
and because of their political clout. This situation made it difficult not only
to launch fundamental reforms of the financial system, but to fully investigate
the real cause of the financial crisis. In particular it has made it extremely
difficult to investigate the responsibility of executives of major banks. As a result, top executives of major banks in
the United States have not learned any lessons from the Lehman crisis. It is
frightening to think that such executives are likely to make the same mistakes
again.
8.
Western
investment banks, British and American in particular, were kept intact with
unhealthy balance sheets. They have not recovered from insolvency, while
superficially they look fine thanks to the bailout, relaxation of accounting
rules and obscure stress test. To get out of this dangerous situation as soon as
possible, they are desperately seeking high returns within a short period of
time.
9.
Investment
banks found good victims for this purpose; countries which suffer from budget
deficits caused by fiscal stimulus they made in 2009 to counter economic
downturn, such as Greece, Ireland, Portugal, Spain, Italy. Banks used excess
liquidity in the market, which had been supplied by central banks supposedly to
enhance the economy, but which failed to stimulate the economy due to the lack
of real demand. Short sales and Credit
Default Swap are used as a means of attack. Consequently European countries have
had to rely upon fiscal austerity.
10.
This
has devastating effect on the recovery of the European economy. As is well
witnessed in the economic crisis in Japan, at the time of economic crisis after
the collapse of the financial bubble, the household sector and the corporate
sector suffered from a hangover of over-borrowing during the bubble period. They
tried to squeeze their balance sheets in order to repay loans. Left alone, this
would result in the shrinking of the national economy. It is the government
sector that has to increase its expenditure to prop up the domestic economy by
way of deficit. But, the attack by the market has made it difficult for European
countries to rely upon such policies. I am afraid that the European countries
are entering a vicious circle of economic contraction.
11.
Fundamental
change of thought to battle against the economic crisis is essential now.
Instead of relying upon austerity, rules and regulations which would make it
impossible for banks to attack countries, such as the Glass Steagal Law, should
be introduced.
12.
With
the introduction of Glass-Steagal, for the purpose of splitting commercial banks
and investment banks, large banks will have to conduct due-diligence in order to
identify their assets and liabilities. It is highly likely that such
due-diligence will reveal that investment banks are insolvent and that there are
no other options for them than liquidation. Cancelling out their positions would
substantially reduce the liabilities of commercial banks. It is hoped that, by
conducting this process and possibly the injection of public money into
commercial banks, balance sheets of financial institutions in Western countries
will be cleared and confidence in the sector will be restored. This is a
prerequisite for economic recovery from the crisis. The options left for us are
very clear; interests of bankers or interests of the general public. The answer
should be very simple.
13.
Huge
amounts of money have been used to bail out banks. Such money was wasted. It did
not help investment banks improve their balance sheets. Instead they were
engaged in another round of speculative trading. Such money should have been
used, instead, to stimulate the real economy. Provision of excess liquidity by
central banks has failed to create real demand and funds have been abused in
attacking European governments and, thereby, brought about misfortune to the
general public in those countries. Fiscal stimulus has to be used for the
purpose of investments; not for the sake of government or private consumption.
It should be recalled that the stimulus package in the United States in 2009 was
absolutely inefficient in this regard. With the depth of economic contraction
all over the world, governments should launch upon a global scale of large,
infrastructure projects to create real demand on a global scale. In addition to
relaxation of international rules that have prohibited private money from taking
risks, such as Basel III, governments should extend an umbrella, in such forms
as government guarantees, to large scale infrastructure projects so that
affluent resources in the market will be mobilized effectively to take risks in
those projects.
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