Thursday, September 18, 2008

U.S. Learns from Japan's Lesson

The Wall Street Journal says that the U.S. is making sure not to repeat the mistakes Japan made when its banking system ran into trouble.
When Japan was mired in economic crisis, the U.S. urged it to take decisive action to deal with its ailing banks. Japan didn't follow the advice and the crisis dragged on for years. Now, it is the U.S. that is mired in crisis and facing the prospect of swallowing the bitter medicine it once proffered. ...

"One of the lessons we took from Japan was the hesitation and refusal to own up to the problem was a disaster," says University of Chicago Graduate School of Business economist Anil Kashyap.

U.S. financial firms, too, have struggled with owning up to the extent of their credit losses, partly because those losses are a moving target. A year ago, Bear Stearns Cos. was reluctant to sell mortgage-related credit at a loss. That decision came back to haunt the firm as declining home prices continued to pummel mortgages, and Bear ended up in a government-backed fire sale to J.P. Morgan Chase & Co. Meanwhile, Merrill Lynch & Co. Chief Executive John Thain said in a January interview that the firm's troubles were "for the most part behind us" — but in July the firm agreed to sell more than $30 billion in mortgage-related assets at a large loss.

Still, U.S. financial firms have been much quicker to acknowledge losses than their Japanese counterparts were. While the slicing and dicing of mortgages into tradable securities played a part in the mortgage mess, accounting rules make it difficult for firms to ignore losses on those securities, says Princeton University economist Hyun Song Shin. In contrast, by continuing to extend credit to bad borrowers, Japanese banks were able to put off recognizing the extent of their debt problems.

"The denial strategy is harder to pull off — it will catch up to you in the accounting," says Mr. Shin. "That's one of the more encouraging and hopeful signs in the U.S." ...

Just as Federal Reserve Chairman Ben Bernanke has been intent on not repeating the Fed's Depression-era mistakes, Treasury Secretary Henry Paulson is intent on not repeating Japan's mistakes in the 1990s, says Brad DeLong, an economic historian at the University of California at Berkeley.

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