Will The U.S. Bank ReCapitalization Work? Lessons from Japan
Myron Scholes Global Markets Forum
November 11, 2008
Having studied Japan’s financial crisis and long economic stagnation in detail, Anil Kashyap shed light on the US problem by comparing US policy responses to the current crisis with those previously tried in Japan. Although the two crises are different in important ways, including the larger scale in Japan’s case, “with each week that goes by, I see the differences becoming less important and the similarities becoming more so,” said Kashyap. In particular, the US Treasury Department’s two preferred approaches to handling the crisis—purchasing bad assets and injecting capital into banks—repeat what Japan did a decade earlier.
Japan’s crisis, which also started with financial intermediaries and falling property prices, similarly reached a point (in 1997) at which several financial firms failed suddenly, and the government scrambled to shore up others. As in the United States, Japan faced the problem of getting some banks—which needed equity injections—to accept them without singling them out from stronger banks that did not need or want new capital.
The government also had to deal with mounting public anger over the cumulative injections of taxpayer money into the banking system to deal with the problem. As with the United States, Kashyap argued, Japan’s politicians faced great pressure to show that these bailouts also benefited “Main Street.” In Japan’s case, that included cajoling the banks to lend money to lots of small- and medium-sized enterprises and other nonfinancial employers, even though these loans did not make commercial sense. An important effect of this policy, Kashyap said, was that these weak firms continued to distort the competitive landscape in several domestic Japanese sectors, making it harder for more productive firms to expand and help the economy.
It is crucial, Kashyap said, to make sure that enough US banks really do end up with enough capital to get the system working again, despite the public outcry, and regardless of whether the relevant banks resist raising more capital. Allowing them to continue paying dividends, for example, was a mistake, Kashyap said. Regarding nonfinancial firms that might be propped up for political reasons, Kashyap did not think US banks would behave like those in Japan. “But,” he warned, “we might cut out the middleman and let the government do it.”