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"Economics of GMS Agricultural trade in goods and services towards the world market"

Chiangmai, Thailand Sep 8-12.

(10/28/08) Prestowitz in Investor's Business Daily

U.S. Hopes Bank Crisis Won't Last Like Japan's

BY DOUG TSURUOKA

Click Here to Read the Story at Investor's Business Daily's website.

The banks of a big world economy teeter after a real estate bubble pops. Regulators fret that the meltdown will spark a global financial crisis. Citizens oppose a bailout.

But injections of government capital into troubled banks eventually save the day.

It's not the U.S. ? it's Japan following a similar banking crisis that swept that nation in the 1990s.

Japan's crisis was triggered by collapsing real estate prices, a weak yen and a plunging stock market. This eroded the asset value of local banks so much that they no longer met the 8% capital ratio mandated by the Bank for International Settlements. They sharply cut lending as a result.

But it took nearly a decade for Japanese regulators to finally address and resolve the crisis from Japan's bubble-burst economy.

Washington isn't wasting much time. It's announced a slew of rescue plans in the last several weeks, rapidly adapting as markets continue to struggle.

Nine U.S. banks will get their capital injections totaling $125 billion this week in exchange for ownership stakes, the Treasury said Monday. Several regional banks added that they too will sell preferred shares and warrants to the government.

These cash injections are part of the $700 billion TARP rescue, which will also soon buy up distressed mortgage assets.

If the past is a guide, analysts say the current U.S. response to shore up ailing banks will produce faster and more effective results. Analysts also suggest U.S. taxpayers eventually will recover a hefty part of the $700 billion or more they're spending to buy bad loans and take stakes in troubled U.S. banks if the economy improves.

"The U.S. is recognizing the problem faster and dealing with it faster," said Clyde Prestowitz, a former U.S. trade negotiator for the Reagan administration who served in Japan in the 1980s.

But that may produce more short-term pain for the U.S. economy.

"The U.S. bailout is definitely going to work faster, but it will feel more brutal," said Steven Clemons, a Japan expert and director of the foreign policy program at the New America Foundation. "The Japanese digested about 10% of their nonperforming loan problem a year ? so while the economy didn't grow, it didn't shrink. Japan was able to keep flat GDP."

Clemons cited the already sharp contraction in the U.S. housing market and consumer spending. With bank lending still pretty much frozen, he says there's no way to avoid a hard landing.

Analysts say it's key for the U.S. to learn from Japan's mistakes.

The U.S. must be more "proactive" than Japan to avoid a recession lasting three-quarters or even one-and-a-half decades, says Robert Lawrence Kuhn, an investment banker with extensive experience in China and Japan.

At the same time, Japan's experience shows a government strategy of taking ownership stakes in ailing banksworks if done properly.

Japan's government recouped $350 billion of the $450 billion it spent in selling off bad loans and stakes it took in banks like the Long-Term Credit Bank of Japan and a host of smaller institutions.

Japan's government had hoped for a better return, betting ona sharp economic upturn that would lift the value of its bank stakes. But the rebound fell short.

A key reason for this was Japan's rapidly graying population and a falling birth rate that hindered growth quite separate from the country's banking problems.

America has a more dynamic and diverse work force that's helped the U.S. economy outperform Japan's. Its baby boomer problem is less pronounced and the country has an expanding population.

The U.S. also boasts a more transparent financial system than Japan's, where bad loans festered for years, often hidden by opaque accounting practices. This makes it easier for U.S. regulators and investors to pinpoint problems and force banks to address them.

All this suggests the U.S. has a better shot at getting its economy back on track faster than Japan, which still hasn't enjoyed a strong expansion in nearly 20 years and appears to be falling into recession along with much of the world.

Some say the U.S. shouldn't be too quick to pat itself on the back.

One of Japan's biggest errors was that the initial money injected into the banking system proved too small. The government was forced to make about a half dozen capital injections to Japanese banks beginning in 1992 and ending in 1999 ? prolonging the crisis.

U.S. Doing Enough?

Some are already saying the scale of the proposed U.S. intervention falls short of what's needed to save U.S. banks and kick-start lending.

European governments have collectively proposed more than $1 trillion in funds for their banks.

"The Treasury has been behind the curve," Prestowitz said. "The Europeans are the ones who are acting faster and better, and we are copying them."

Some analysts say the need for a larger U.S. bailout is highlighted by the size of the U.S. financial system. There are about 8,500 banks in the U.S. There were about 900 in Japan at the height of the bad-loan crisis in March 1998. Japan's tally included commercial, regional and cooperative banks, and credit co-ops.

The U.S. approved an economic stimulus bill early this year. That gave consumer spending a boost in the spring. But like many of Japan's similar efforts in the 1990s, it didn't have a lasting effect.

Now momentum is building for a second, larger stimulus. Democrats are talking about a $300 billion package. Fed Chairman Ben Bernanke said last week that lawmakers should mull a "significant" package.

"I don't know what the right stimulus number is, but I don't think the (U.S.) government should be too cautious. This time, it may be better to err on the side of too much rather than too little," said investment banker Kuhn.

Japan offers one more warning for the next administration. Its economy finally seemed to be on the mend in 1997, when the government decided to cut public works spending and hiked the national sales tax. This helped undermine the expansion and a new recovery didn't really get started until 2002 or later.

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