A Japan Banking Holiday?!
According to a Dow Jones newswire article (a link is attached
below) C. Fred Bergsten, director of the Institute for International
Economics, is recommending that Japan take a page out of
President Franklin Roosevelt's book and declare a "bank holiday"
for as many days as it takes to perform radical surgery on the
country's broken down banking system. According to Mr. Bergsten,
that's the kind of radical measure needed to clear out the banking
system's nonperforming loans and jump-start the Japanese
economy after 10 years of malaise. "Unwillingness to risk a hard
landing or even to force zombie companies or insolvent banks
themselves into bankruptcy, has precluded any prospect for a
serious turnaround."
In Roosevelt's case, the nationwide banking system was shut down
for 10 days in 1933 during the Great Depression to prevent a run on
the banks while regulators examined the books, closed insolvent
institutions, and sorted out depositors accounts. In Japan the
number of days required would be "probably much fewer," says Mr.
Bergsten, who served as assistant Treasury secretary for
international affairs during the Carter Administration. According to
Mr. Bergsten, the initial impact would push up unemployment
sharply following the closure of failed banks and other
corporations. "However, the markets should respond quite positively
at the prospect, finally, of a recovery from the lost decade".
Because the banking system restructuring would probably trigger a
short-term economic contraction, the government would need to be
ready to stimulate the economy, primarily in the form of tax cuts.
The government would also need to step up investment spending,
but avoid its "wasteful public expenditures of the past - or bridges to
nowhere." In light of the huge loss of economic output suffered by
Japan over the past 10 years, the recovery could be quite sharp,
with the economy expanding by 3% or 4% annually during several years of
"catch-up growth".
http://story.news.yahoo.com/news?
tmpl=story&u=/dowjones/20030625/bs_dowjones
/200306250545000456
(TT's Take:) While most would agree that as much as half of Japan's banking
system is insolvent, that NPLs approach 20% of GDP, that the
banks are currently unable to perform their traditional function as
financial intermediaries in being "money multipliers" for the
economy, and that solutions to date have been piecemeal. What is
disturbing, however, is the suggestion that a banking holiday be
declared.
What Mr. Bergsten does not say about the 1930s is that 9,000
banks closed their doors in the US between 1930 and 1933, and
more than 5,000 still in operation when President Roosevelt
declared the bank holiday did not reopen their doors when it ended?
and over 2,000 of these never opened their doors for business again.
Moreover, the bank holiday in the US did not "solve" the US
depression. Indeed, the US lingered in depression for the rest of
the decade, until the start of World War. On the other hand, the run
on the banks during the Showa Depression in the 1920s in Japan
was instrumental in pushing Japan into depression.
News of an impending bank holiday would most likely be "leaked",
causing a "cash run" by companies and individuals as they try to
secure spending cash for the bank holiday. In addition, if there is a
complete stoppage of bank transactions, what would happen to the
bond, equity and other financial markets dependent on banks for
settlement? If you effectively shut down all economic activity for ten
days, you effectively are guaranteeing a shrinkage in Japan's GDP
of some 3.8%. And that's not counting the drag on the economy
from closing institutions and pulling the plug on their heavily
indebted borrowers. In other words, the GDP damage could be as
high as 10%. To offset a GDP hit of this magnitude would require a
gigantic stimulus package of several tens of trillions of yen, on top
of the capital infusions for banks that you want to save. As Mr.
Bergsten mentions, the bad loans in Japan's banking system are as
high as 20% of GDP or approaching JPY100 trillion. The bond
market's reaction to the government's need to issue bonds of this
magnitude for the clean up over a short period of time could well
slam-dunk the world's largest bond market, thereby completing the
cycle; i.e., a crash in equity prices, a crash in property prices, a
crash in bond prices, a "crash" in Japan's government finances, and
then a crash in the yen amid full-scale depression. If that is the
solution, I for one would prefer the solution of the Austrian
(classical) economists, i.e., have the government just do nothing.
