Turning Japanese?

Yesterday’s NYT continues the paper’s excellent coverage of the financial crisis with Hiroko Tabuchi’s article “In Japan’s Stagnant Decade, Cautionary Tales for America.” Notable quote:

‘“I think they know how big it is, but they don’t want to say how big it is. It’s so big they can’t acknowledge it,” said John H. Makin, an economist at the American Enterprise Institute, referring to administration officials. “The lesson from Japan in the 1990s was that they should have stepped up and nationalized the banks.”’

When someone from the American Enterprise Institute says it’s time to nationalize, then it’s probably time for policymakers to show a little openness to it (e.g., “only as a last resort,” “we’re not ruling out anything”).

Alas, that’s not the case with the new administration so far.  The idea had already been rejected by Larry Summers and President Obama in interviews, but Tim Geithner poured even colder water on it recently, as Joe Nocera relates:

‘Mr. Geithner simply doesn’t seem able to get his head around the idea of nationalizing a big bank. As he told the New York Times columnist David Brooks recently, “It’s very important that we don’t look like there’s any intent of taking over or managing banks. Governments are terrible managers of bad assets. There’s no good history of governments doing that well.’

Nocera is having none of it:

‘But that’s a canard. The government did a terrific job managing banks during the savings and loan crisis of the 1980s. It took over banks — “we called them bridge banks,” recalled William Seidman, the former chairman of the Federal Deposit Insurance Corporation, with a chuckle — replaced their top managers and directors, stripped out bad assets that the government then managed brilliantly, and sold the newly healthy banks to private buyers. It turned out not to be all that hard to find actual bankers who could run these S.& L.’s for the federal government.’

Exactly.  It’s not as if the idea is to turn the banks over to politicians or low-level federal bureaucrats.   Need a banker?  Hire a banker.  Nocera also notes the more recent case of IndyMac in California, which the FDIC ran for six months before selling it to a private group.

Yet another memorable quote in Nocera’s article is from Simon Johnson, former research director of the International Monetary Fund, about as orthodox and pro-market a group as you get.   What’s the IMF’s take on nationalizing banks?

‘… [Johnson] is especially passionate about the importance of having the government take over insolvent banks, no matter what their size. “This is exactly what the I.M.F. tells an emerging market country to do when it is facing a crisis — like Thailand in 1997, or Russia in 1998,” he said. “We used to tell governments to close down some of the banks, and take over others, and inject them with government capital. It is not only simple and straightforward. It is also best practices.”’

Japan took too long to come to grips with its big problem banks, instead lumbering through a lost decade of half-measures like “ultra-low interest rates, fiscal stimulus and ineffective cash infusions.” Will the U.S. continue in Japan’s footsteps?  Geithner’s proposed “stress test” for the banks could force the issue — once a bank fails one of those tests, its investors will flee, and then what?

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