What Not to Do in a Financial Crisis: U.S. Learns From Japan
Wednesday, September 17, 2008
How do we avoid becoming another Japan?
That question has prompted U.S. officials to move aggressively in recent weeks as they seek to save the American financial system while avoiding the kinds of regulatory pitfalls that plunged Japan into economic quicksand almost two decades ago. Although the world's second-largest economy buckled during a collapse of its real estate and stock markets, it was, many analysts say, government mismanagement that made the crisis even worse.
The result was a diminishing of Japan's economic power and global influence lasting to this day. After falling 66 percent from 1990 to 2005, Japanese housing prices have climbed back to only 40 percent of their 1990 values. Tokyo's key Nikkei stock index remains a dim echo of its former self, still 70 percent off its 1989 high.
Now, U.S. officials, who long argued that the Japanese needed to be more aggressive and hands-on, appear to be practicing what they preached. Aided by a far more transparent financial system that has made it more difficult for U.S. banks to hide the extent of their bad bets, regulators have accelerated a reckoning for some of the most vaunted names in American finance, generating a historic upheaval on Wall Street. The effect, leading analysts say, could ultimately be a briefer bout of economic pain than what the long-suffering Japanese have had to endure.
"The U.S. is moving in dog years compared to Japan," said Adam Posen, deputy director of the Peterson Institute for International Economics and a former consultant to the U.S. government on the Japan crisis. "Every one year of action here is about equal to what it took Japan seven years to do."
The sharply different U.S. approach is no coincidence.
American regulators have been actively seeking advice from Japan, hoping that a better understanding of its mistakes will aid them in navigating their own country's financial crisis. Advice has largely come during frequent talks over the past year, during which U.S. financial officials met with their former and current counterparts in Japan.
"When things became quite turbulent in July and August of last year, we were talking to them within weeks," said Clay Lowery, the Treasury Department's assistant secretary for international affairs. He said government officials have been in close contact with a number of other countries, including Sweden, which is credited by experts with comparatively deft handling of its financial crisis in the early 1990s.
With the Japanese, he continued, "we wanted to talk to them about some of their issues, some of their problems."
Critics say Japanese regulators wrote the book on how not to handle a financial crisis, at first refusing to admit a problem, then moving slowly -- and often ineptly -- when they did. At the time, Ben S. Bernanke, then a Princeton University economist and now chairman of the Federal Reserve, was among those to fault the recipes the Japanese were using.
It is too early to gauge whether U.S. efforts will ultimately prove more effective than those taken by the Japanese, and economists on both sides of the Pacific warn that the biggest tests probably lie ahead. Analysts are questioning the health of regional and mid-size banks across America, and many economists are reserving judgment until they can assess how aggressively U.S. regulators move to force complete disclosure of bad debt and consolidation within the industry.
But the Japanese say they have marveled at the relative speed at which U.S. regulators have moved recently to sell off Bear Sterns, take over mortgage finance giants Fannie Mae and Freddie Mac, and encourage market solutions for Merrill Lynch and Lehman Brothers. By comparison, the Japanese came under heavy fire in the 1990s for allowing bad debt and ailing banks to linger for years.