The following is the presentation from our
conference in Frankfurt on April 13-14, on "A New Paradigm for the Survival of
Civilization." Daisuke Kotegawa, a former director of Japan's Ministry of
Finance, and former Japanese representative to the IMF, addressed the insane
policies which have caused the collapse of the trans-Atlantic financial system.
He concludes with the powerful demand that "the
Glass-Steagall Act be reinstated and investment banks be liquidated as soon as
possible to save Europe. This is a war against filthy bankers who gained a lot
of money from gambling, and let taxpayers pay for their losses."
The entire conference
proceeds are available at http://newparadigm.schillerinstitute.com/
, including presentations by Lyndon and Helga LaRouche, four prominent Russian
political and scientific leaders, and spokesmen from Greece, Ukraine, France,
China, the US, Italy and others, all on the urgency of emergency measures to
save civilization form the on-rushing economic and strategic collapse.
Mike Billington
This transcript appears in the
April 26, 2013 issue of
Executive Intelligence Review.
DAISUKE
KOTEGAWA:
The Lost Two Decades
Of the EU and USA?
As a
director of the Ministry of Finance, I was in charge of liquidations of major
financial institutions in Japan in 1997 and 1998, such as Yamaichi Securities,
LTCB, and NCB. At that time, we succeeded in containing the gigantic scale of
liquidations, and avoiding Japan becoming an epicenter of world economic crisis.
During the weekend when we liquidated these institutions, we unwound all
cross-border transactions, including huge amounts of derivatives. Such unwinding
was not done by the authorities of the United States and the United Kingdom at
the liquidation of Lehman Brothers, which triggered the world economic
crisis.
Despite our
success, however, we were heavily criticized by the national public and
international opinion leaders, including [former Treasury Secretary] Larry
Summers, those who are struggling now to deal with the crisis. As a result, we
went through an investigation of public prosecutors, and I lost several friends
who worked with me; some were arrested, and others committed suicide, as did
board members of major financial institutions which were liquidated.
It is quite
strange to see that those Japanese who worked to avoid the world economic crisis
were punished, while nobody that was responsible [for the latest crisis], has
been punished.
In the
meantime, as a survivor of the crisis, it is easy for me [to see] what will
happen next in the ongoing crisis: a déjà vu of ten years
ago.
The Lehman
Shock
Why are
people in Europe suffering from economic crisis? The answer is simple. The
bubble created, since the early 2000s, exploded with the Lehman shock. What is
an economic bubble then? An economic bubble occurs when people dream that
prosperity will last forever. In the case of Japan, people dreamed that prices
of real estate and stocks would rise forever. What happened in the Western
world? The crisis now was triggered by the completion of the abolition of the
Glass-Steagall Act in 1999. This policy change enabled investment banks to
mobilize deposits collected by commercial banks as the source of their dealings;
which sometimes could be called gambling.
It also set
the stage whereby the loss incurred from dealings of investment banks could be
covered by the injection of public money to save the financial system. The
amount of dealings by investment banks, including derivative transactions,
skyrocketed. False, virtual, and imaginary profits or commissions resulting from
these dealings brought investment bankers extraordinary incomes and bonuses.
Investment banks on Wall Street, such as Goldman Sachs, Merrill Lynch, Morgan
Stanley, and JP Morgan, and in the City of London, such as Barclays, Royal Bank
of Scotland, and Lloyds, enjoyed an unprecedented level of profits. Some
institutions outside the Anglo-Saxon countries, which were partly Americanized,
such as Deutsche Bank and UBS, followed suit.
The other
imaginary bonanza that was experienced in Europe during the same period should
be called the EU membership bubble. Newcomers to the EU, and sometimes
candidates for membership, enjoyed extraordinary capital inflows, which led to
steep increases in wages and prices of real estate. The membership standards
were sometimes maneuvered artificially, using derivatives proposed by investment
banks.
These bubbles
collapsed in 2008 with the liquidation of Lehman Brothers.
What Did They
Learn?
In the U.S.A.
and in Europe, they seem to have learned nothing from the crisis in the late
1990s—that is, how we should try to maintain confidence in the financial
markets, and the difference between the regular kind of economic slowdown, and
the crisis that was caused by the financial crash. Examples are abundant,
starting with the crisis in Mexico in 1994, followed by the Asian crisis and the
financial crisis in Japan, which happened while I was in charge.
As I have
mentioned again and again, repeatedly, there are two steps countries must take
to deal with an economic crash caused by a financial crash:
Firstly,
countries must restore confidence in their financial system, and then, secondly,
by way of fiscal stimulus, countries must revitalize the real economy. In order
to restore confidence in the financial system, countries must create three kinds
of safety nets:
- Establish a mechanism to
bail out financial institutions;
- Establish a system by which
you can log the non-performing loans; and,
- Establish a system whereby
you can guarantee interbank lending, by the government.
These safety
nets were established in the trans-Atlantic region in October 2008, after the
Lehman shock. But, then, the order of the actions taken to deal with these
systems was completely wrong. Let me present you an ideal way that should have
been done.
- A
rigid examination of balance sheets by public authorities, based upon
mark-to-market accounting, would calculate an honest amount of non-performing
loans.
- Such a calculation must have
disclosed an unprecedented amount of non-performing loans, because there were
no quoted prices for securitized products after the Lehman shock.
- Most of the major banks in
the Western world, investment banks in particular, would become largely
insolvent as a result.
- The
total amount of public injection required to bail out those banks must be
calculated honestly, and be disclosed to the public. This process is essential
to inform the market of the magnitude of the problem and, once the bailout is
done, restore confidence by showing that all amounts of non-performing loans
were covered by the injection of public money, and that surviving banks are
clean.
- Most of the investment banks
must be liquidated, because the amount of public money required is beyond the
level which can be covered.
- Managers and board members
of failing institutions that needed public money have to be prosecuted for
their responsibility for making the use of taxpayers' money indispensable to
save the financial system.
In the case
of the United States and the European countries, those kinds of very neutral,
dependable financial examinations by the banking authorities have never been
conducted. Instead, a fake examination, called a stress-test, was introduced to
distract attention. Bankers have been window-dressing their balance sheets,
which should have been condemned as insolvent long ago. Without that kind of
transparency, it is impossible to persuade all the participants in the market
that all the financial institutions' balance sheets have been
cleared.
Bad
Advice
This is an
anecdote: When we suffered from the financial crisis in Japan, we received much
advice and preaching from prominent economists in the U.S.A., including Larry
Summers. The advice can be summarized as follows:
- Banks should be hard-landed,
that is to say, should be liquidated.
- Stick to mark-to-market
accounting to calculate the amount of non-performing loans.
- Do
not stop short sales.
- Do
not bail out banks.
As you can
easily recall, after the Lehman shocks, these recommendations were never
observed by those who gave them.
If most of
investment banks had been liquidated after the Lehman shock, European government
bonds would have not been under the attack of short sales and credit default
swaps by investment banks. It was those investment banks that attacked European
government bonds, seeking high profits in the short run, in a desperate struggle
to get out of insolvency. Such attacks brought about the tightening of budgets,
despite the fact that, after the financial crisis, the government is required to
put in a fiscal stimulus, because households and private corporations have to
squeeze their balance sheets in order to repay their over-borrowing.
As mentioned
above, however, activating such a fiscal stimulus was made difficult by the
attack of the investment banks on government bonds. European authorities have
not prosecuted the banks which caused this crisis, and gained the most. Instead,
they have recommended the completely wrong policy of fiscal austerity, and put
the burden on ordinary taxpayers. This is a ridiculous situation and, if such a
stupid policy were to continue, Europe will have to suffer from two lost
decades, I am afraid.
Cyprus: A Stupid,
Crazy Policy
Taking this
opportunity, I would like to comment on a stupid, crazy policy taken by the EU
authorities regarding Cyprus. It is of the utmost importance to guarantee a
certain level of deposits for all depositors in the country. So, in most
countries now, we have a certain ceiling under which all deposits would be
protected during any kind of financial crisis. But what happened in Cyprus was
completely opposite to this policy. They have been trying to introduce a system
whereby depositors are also asked to lose part of their deposits. This will
completely destroy confidence in the financial system, and thereby aggravate the
financial crisis.
So, I can't
understand why people in Brussels should use this kind of stupid policy, which
in everybody's eyes, at a glance, is a completely wrong policy for maintaining
the confidence in the financial system.
Let me
elaborate why. As you know, a bank can operate as long as it maintains 10% of
its total assets as equity. The essence of the banking business is this creation
of confidence. Take an example whereby a bank has total assets of 100 million.
It does not need to keep 100 million available for payment, because, as long as
confidence in the system is sustained, depositors would not demand their
deposits back in an instant. The difference between the 100 million and the
requirement of 10 million can be used as the source of lending, in addition to
the equity held by the bank.
The policy
taken by the EU completely destroys such confidence. It violates the basic
notion of how a bank can exist and operate. I hope that this kind of policy,
which has been advised by Brussels, will be reversed as soon as possible,
because this will have tremendous contagion effects for the other countries in
question.
It is of
vital need now, that the Glass-Steagall Act be reinstated and investment banks
be liquidated as soon as possible to save Europe. This is a war against filthy
bankers who gained a lot of money from gambling, and let taxpayers pay for their
losses, while they avoided paying taxes, using tax havens, and against the
financial authorities who are their allies. This is a war for diligent workers
who work hard, save small amounts of money in deposits in commercial banks, and
honestly pay their taxes.
That's my
view. Thank you.
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