It surprises me how few people followed up the logic from my Japan and Korean banking collapse post.
Japan and Korea had very similar industrial structures. You can get into a lather describing differences between Keiretsu and Chaebol – but if you look at the heavy industry and government support and how the finance worked it was all very similar.
When the system broke down in Japan there was never any great recession – but there was never a recovery. Growth just slowed to anaemic levels and stayed slow for two decades – the lost period. However the average Japanese person doesn’t have a lot to be unhappy about. Real wages stayed high, employment, whilst more difficult than in the boom years, remained fairly easy to obtain. You would describe the situation as malaise – not failure. The people who think it was a failure are largely people who played the Japanese stock market – which forever looked really cheap, only to get significantly cheaper. It is my class (stock-investing capitalists) who think of Japan as a failure.
Korea by contrast had a true banking collapse. The banks were not only insolvent but illiquid. They could not lend – and several Chaebol crashed and burnt. Even quite large modern companies (Hynix for example) failed. Indeed it is only the strongest of the Chaebol that got through (notably Samsung).
But the Korean experience was considerably worse for Mr and Mrs Soon (and their average Korean family) than it was for Mr and Mrs Watanabe (and their average Japanese family). In Korea there was a five fold increase in unemployment (admittedly from very low levels) and a very large increase in small business insolvency.
Korea’s advantage was that it recovered.
I argued that the problem in Japan was their ability to keep zombie corporations (not zombie banks) alive for decades. Japan has a “Rip-Van-Winkle” industrial legacy to go along with its absolutely brilliant modern technology industries. This old industry sucks resources which would better be used by the modern industry. It makes sense to keep the old industries alive during a deep recession because the resources would otherwise be unemployed. It makes no sense to keep them alive long term as you wake up 30 years later (as per Rip-Van-Winkle) and lo – you still have the old industrial structure.
Translate this to America – and the standout yesterday industries are Detroit and mortgage broking. The US at peak had about 500 thousand mortgage brokers or one per sixty mortgages outstanding. This was insane – and it has changed. Detroit also (politely) looks as if it will employ about two thirds as many people (or less) after the bad bits of Chrysler and GM are closed as part of the bankruptcy process.
I also argued that the problem with Korea was that the banks became totally illiquid and hence were unable to lend at all. This mattered because not only inefficient Chaebol died – but plenty of good stuff suffered the same fate. A banking system that cannot lend is indiscriminate about who it kills. It will result in the death of dodgy businesses – but will also kill perfectly fine businesses that need cash for short term requirements.
If you want to avoid the really deep malaise that was Korea then keep the banks liquid. Then at least they will lend to the more worthy borrowers – and whilst industry will die banks can be selective about who they kill.
Killing Detroit whilst bailing out fat-cat bankers is politically unpopular. If you want to see a justifiably upset victim have a look at this letter from a Dodge dealer. I don’t think the political sentiment in the letter is accurate – but it is perfectly understandable.
Likewise there is no end of complaint about bailing out banks so they can continue to pay million dollar bonuses – and the political sentiment in those complaints is accurate and entirely understandable.
So let me say I agree with the unpopular. I think the Obama administration is right to let Detroit file bankruptcy and to bail out banks. I know this is unpopular – I just think the outcomes will be better that way. I am very impressed by an Administration that does things that are so politically offensive but probably ultimately the right thing to do. That doesn't make the political pill any easier to swallow.