The Lesson of the Kobayashi Maru Test

In an interesting article John Hampton of Bronte Capital compares the banking crises of Japan and (South) Korea, by comparing the structure of their economies, their financial sectors and the outcome of the two crises.

In short, he describes the crisis in Japan as (highlighting by me)

1).  The bank[s] made lots of bad loans – firstly to heavy industrial companies and secondly to real estate related companies (golf courses, department stores etc).

2).  The loans could not be repaid.

3).  The system was never short of funding because the Japanese housewives (the legendary Mrs Watanabe) saved and saved and saved – and the banks were thus awash with deposit funding.

4).  The savings of Mrs Watanabe went on – indeed continued to grow – with zero rates.

5).  Zero rates and vast excess funding at the banks made it unnecessary for the banks to call the property holders and (especially) the industrial giants to account for their borrowings.  Everything was just rolled.

6).  Employment in the industrial giants of Japan thus never shrank (Toshiba alone employs a quarter of a million people).  The economy continued to sink its productive labour force into dinosaur industries and dinosaur department store chains.

7).  The economy stagnated – but without collapse of any of the major banks and without huge subsidies to the banking system.  [The number of banks – mostly regional banks – that failed during the crisis was not large given the depth of the crisis.]

He goes on to compare this with the crisis in South Korea, whose economy was organized in a very similar way to the Japanese’, with one crucial difference: The Korean housewives did not save as much as the Japanese. This, according to John, is why many South Korean banks ended up as government property and many of the industrial conglomerates (chaebols) did not survive, whereas their Japanese counterparts (keiretsus) did.

So the Japanese version of capitalism worked only because the Japanese banks were funded cheaply with billions of Yen from the savings of Japanese housewives put in them basically for free. This money was then put back into the keiretsus, who were not really profitable, but didn’t have to worry about having their credit lines canceled, or having to pay the principals back – the debt was just rolled over. In turn the keiretsus kept people at work (I guess mostly the husbands) to spend their time in the office, without doing anything really useful, but at least they had a salary which their housewives could then put into the bank account again.
I think we are to assume that the Japanese economy still works that way, however, they are now losing something more: Their overseas markets. I don’t think the story ends where John wants it to end.

In Korea, the chaebols ran out of cheap capital and failed, because South Korean housewives were not saving as much as their Japanese counterparts.
This is much closer to the result that you’d expect in a market economy. You make mistakes, you pay the price, if you can’t pay your bills you risk bankruptcy. This is, at least in theory keeps market efficient.

According to John, the recession that followed were different in both countries, but so was the recovery:

Korea had a much worse recession than Japan.  Vastly worse.  Japan was just low growth for a very long time.  By contrast the Korean economy crashed and burned.  But it also recovered very fast and at one point (1999-2000) the Korean Stock market was 1932 Great Depression cheap.  It bounced.

As far as I know the US and Western European economy are not organized in chaebols or keiretsus, or is it? It is then not immediately clear, why the Japanese or Korean banking crises would provide an example or even a lesson that can be used to resolve the current crisis. I seem to remember clearly that the Swedish model to deal with their banking crisis was discarded with the argument that ‘we are different from Sweden, we don’t work that way here,’ and yet the Japanese model was accepted and embraced without discussion of any kind. It looks we are running into the NIH syndrome.
The current thinking in Washington is, that they must look to Asia and specifically to Japan to learn how to resolve the banking economic crisis – any other approach is out of the question.

But having looked to Asia, they should have looked to South Korea, not Japan, because the South Korean economic model is much closer to the US, the latter still touts itself as a market economy based on economic principles and not as a highly cartellized and regulated economy of “corporatsus” – oh wait, maybe the US is indeed organized into corporatsus?

At least that would explain Geithners fixation on Japan. I first thought he is looking to Japan because he doesn’t know anything else. After all his background is a Japanese, Thai, Chinese one.

But the Administration does not even get the Japanese version of dealing with things right, after all the corporatsus are failing only the major banks are catered for. The Japanese model necessitates that people are kept at work, paid a salary that they can live on and then some – bo be able to save – and provide the banks with cheap capital in terms of deposits (until the FED nixed their rates, this was the cheapest form of capital for banks) and it necessitates that the banks care for the members of their keiretsu without regard for their own profitability. Major flaw in the thinking of Geithner, Summers, et al.
It looks like the Administration together with Wall St. is trying to run an economy without people. Of the bankers, by the bankers, for the bankers.

Which brings us to the deeper issue: Japan has had their overseas markets they could export to because somebody must consume in a consumer driven global economy. If not the Japanese, then the Americans, Europeans, etc. But that leg on which the economic order rests has been destroyed as well. No jobs, mass lay-offs already within sight or jobs with salaries that don’t allow living let alone saving.

So, the Anglo-American version of capitalism is a failure. The Japanese version doesn’t work either – or maybe it does, if you don’t expect growth (but that’s no longer capitalism, isn’t it). The South Korean model, is something in between, but is not really working either. All of them require solvent consumers.

That leaves us with the EU, China and Russia. Then again, Russia is not in a good state, as the revenues of oil and gas on which they depend have crashed, so the Russia’s version of capitalism is not working either.
China then? Not so sure. They depend to a very hight degree on exports which requires people in other countries to consume, so China’s not really a success story either. Chinese are reluctant to consume, they rather save, for several reasons. Which would be good news for the Chinese banks, as they are provided with cheap capital. But since Chinese don’t consume some one else must, but doesn’t. So that model fails as well.
That leaves us with the EU. Let’s look at what the have, at least in the western part: Social safety net, health insurance, sound public infrastructure, higher savings rate and less debt in households. Looks like they are doing something right, after all. On the other hand, much of the income for European workers is also depending on demand for industrial products in Asia. Goods that are used to produce the other goods which are then consumed in Europe. But, dogone it, now, demand in Europa starts cratering as well.
Same story here, all of them require solvent consumers to work.

This looks an awful lot like the test that cannot be solved with conventional thinking.