THE AMERICAN WAY:

Don't Repeat Japan's Mistake: We know how to fix banks. We did it the 1990s. So why aren’t we taking that approach again? (Stephen Robert, 3/18/09, Daily Beast)

As is now well-known, by refusing to recognize the dire condition of Japan’s banks until the late 1990s, Japanese policy makers prolonged their country’s malaise and made economic recovery more difficult.

In the same decade, things were done dramatically differently in the US, when many savings and loan associations failed, and in Sweden. In both cases, the government quickly took control of the banks, cleaned up bad assets, and returned the banks to private ownership, a strategy that resulted in shorter and far less severe economic declines. Sweden had to choose between hoping its banks could earn their way back to solvency or taking them over for a brief period. The Swedish government decided that the former path was too dangerous because it could be lengthy or things could get worse—something that with each passing day may now be dawning on the new Obama administration. In the US in the early 1990s, the government set up the Resolution Trust Corp. to deal with the toxic assets infecting the balance sheets of failing S&Ls.

This time around, however, the US Treasury Department appears to be veering toward the problematic Japanese approach. [...]

This bank-cleansing process could happen relatively quickly. IndyMac, seized in late 2008 by the FDIC, is already in the process of being returned to private ownership. Washington Mutual, another recent ward of the government, was restructured and quickly sold to JP Morgan Chase. Nor does the government have to get in the position of trying to manage these institutions over an extended time period, something critics have argued, probably correctly, that it is incapable of doing. The government can, and often has, financially restructured banks and changed boards and managements before privatizing them once again. And there is another hopeful precedent to proceeding in this fashion: When the US government took over scores of S&Ls in the 1990s, the cost to the taxpayers turned out to be only about 20 percent of what was predicted.

With every passing day of White House indecision, George H. W. Bush looks better, eh?

Posted by Orrin Judd at March 18, 2009 7:02 AM