Japanese, Korean and US Crises

Let me return to a previous post, The Lesson of the Kobayashi-Maru Test where I analyzed John Hempton’s article on Bronte Capital about the banking crises in Japan and South Korea. In today’s post, John elaborated his arguments, so I’d like to have a look at those.

If I understood him correctly, then John argues – in my words – that the banking system must be maintained at all costs, otherwise the US and world economy will behave like the South Korean economy and go into a (relatively) short, painful recession in which many legitimate and profitable businesses would go belly-up, simply because they cannot get any credit from the failing banking system. It is thus preferable to keep the US banking system alive – even if unpopular – so that the US economy will behave more like Japan, where people where kept at work with stable salaries. However, this was at the cost of a drawn out malaise with no recovery for twenty years or so.
I agree with the thrust of this argument, with some differences though.

It is worthwhile to compare Japan to the US as the factors mentioned above are concerned.

First, how did the Japanese and U.S. banking actually work?

The Japanese banks were working with real money, i.e. they took the deposits the Japanese made on their bank accounts and loaned these out to industrial firms. This is what banks historically have done for hundreds of years – taking deposits and making loans.
In turn those industrial firms kept people at work with decent salaries, who then could consume and again make deposits. This cycle was based on real value.

The US banks, in contrast, did not work the same way. They did not loan out money that was deposited with them by Americans. They invented ‘money’ by doling out loans in all sorts of forms. Then they sold that debt after neatly packaging it into opaque derivatives, and everyone believed and acted as if those derivatives were worth the amount of US dollars attached to it. However, they never were worth that, simply because banks are not allowed to print money. Those derivatives were just repackaged debt that was sold around the world. Profits came from this reselling. But debt is a contract based on a promise to repay (with interest), if the promise is broken for whatever reason, the derivative is worth less or even nothing. With a dollar, being official legal tender, you can at least still buy a loaf of bread. With a broken promise, you cannot buy anything.

Japan, then, worked with real money and deposits, the US worked with Monopoly money and credit/debt. Japanese where thus creditors of their banks, whereas Americans are debtors to their banks. This is a pretty important difference in my view.
As a result, the Japanese government did not have to pump in trillions of Yen into the banks and blow up its budget deficit and debt to plug a gap of real worth and imagined worth – as there was no such gap.

There seems to be another, maybe cultural, difference. The banks obviously were ok with this arrangement and didn’t feel the need to be very profitable either – in short, they didn’t have to worry or care about the share-prices. They also don’t seem to have been too concerned about doling out big bonuses to themselves and their buddies. As John points out correctly here, the only people that didn’t like this arrangement were ‘stock investing capitalists like him’. For all others, the arrangement worked.

Not so the US bankers. Their first, last and all other thought is about themselves. They are concerned about their own well-being only, and even in times of crisis and peril for the whole nation, they think they need to earn more because they are so great – forgetting completely, that it was them who caused this problem in the first place. There is no self-reflection, no introspection no sense of remorse, let alone even guilt. They just think they are entitled to go on to do what they have done. There is a real mortal danger in allowing them to do that.

Second, Japanese and American industrial enterprises

In Japan, industrial companies (heavy-industry) that should have folded were maintained with the loans from the Japanese banks, not from the government, as is done in the US.
How did those companies manage to stay in business at all? Obviously they must have found someone who actually bought some of their products, they just weren’t able to make a profit from it and thus couldn’t repay banks’ loans in their entirety.
In the case of the steel-industry, keep in mind that even if it is not sexy from an investment point of view, it still is the basis of many other things we take for granted. Cars, trains, buildings, ships, airplanes and many more rely on the steel industry. So while the Japanese steel industry taken by itself may not have been profitable, the car industry was very successful all over the world. This justified the Japanese loans to this industry, if you take a systemic view.
It is the same for the US car industry. Just because it currently doesn’t turn in a profit, doesn’t mean the industry is completely useless and thus expendable.  They are still helping to enable other parts of the economy to turn in a profit. And let’s not forget that many people have to rely on their cars for work, living, leisure, etc. In my view, they even have a unique opportunity to ditch outdated technology and push fuel-cell technology. Details are here.

However, in general it is true that companies or even whole industries that are no longer viable should be allowed to fail. The diminishing resources mankind has available simply don’t allow for the propping up of inefficient technologies just to keep people at work. Such policies are not only distorting the market, they are impeding innovation and progress and are in the end self-defeating. Unfortunately, currently there is no choice – people need to be kept at work, proving them with a living wage so that this consumer driven economy is kept working.

Third, the systemic view

You might want to look at the economy as a social ‘eco’system. The rules of which can be set by humans as they choose, subject, of course, to certain real physical conditions and constraints. The important thing is to be aware that there is no natural law that determines that the economy must function the way it currently does. We do have a choice.

It is simply not true that everything must be or should be organized around the financial sector. They do not produce anything except debt and misery – but that in abundance.
Every solution therefore has to start with the people.
That’s what Japan did – maybe without being aware of it, but nevertheless did. In the U.S. this would have to be achieved with government intervention. Instead of doling out money to the banks, dole it out to people.
This could be done in the form of a basic guaranteed income. With that people will a) consume some, b) save some and c)pay down debt with some of it. This will help wipe out the debt, or at least reduce it significantly and allow the banks to retire these moronic derivatives.
In fact, this is now required by law. If one accepts the concept of corporate personhood, then there is no legal basis for treating a corporate person better than a normal person. Equality before the law requires that both be bailed out.
Besides, the U.S. consists of its people and the States. Neither in the Constitution nor in any act can I find a law or rule that makes corporations, banks or the financial sector a required part of the social contract. They are simply disposable. However, strangely enough, the government has opted to pamper these entities and even more strangely, refuses to support individual citizens or the States. History will demand an answer for that choice.

Fourth, the morals of the story

It is an error, in my view, to expect every link in a production, service or supply chain to turn a profit – this is not possible, simply for the reason that the money supply is limited, i.e. finite. If someone makes a profit, someone else – or several someone else’s – will need to make a loss.
The market economy is in essence nothing but an organized – and more or less civilized – way to take away each other’s money. The one who does this most efficiently, or is the most ruthless in doing so, wins, i.e gets richer or is ‘profitable’.
By bailing out the banks and the bankers, you are teaching people individually, and society as a whole, a lesson. You reward failure, recklessness, lying, cheating, cooking books, fraud, theft, greed, sociopathic and psychopatic behavior, bullying and abusing other people.
Such behavior must be punished not rewarded. Otherwise the next generation of abusers will be even worse. Let me illustrate what we can be expecting from this, with this article.

Do you really want to live in a world where those are the new ‘values’ and everyone is asked to behave like a psychopath to be successful? You cannot ignore the effect on society this is going to have. Especially keep in mind that those people do not feel bound by and do not feel obliged to respect human rights, in fact, by bailing them out, you negate the values as set down in the Constitution.


What we have is a consumer driven economy. To work it needs consumers. Obviously, people cannot consume (or save) if they don’t have a regular income which covers a bit more than the basic necessities people need to live. Income for people can be achieved as Japan did.
However, this will lead to inefficient allocations of resources to companies that are simply not viable anymore as times have change and which should be allowed to fail. However, letting the company fail, doesn’t mean that the people who worked for it need to fail as well.

Thus, from a social point of view as well as from an economic point of view (efficient allocation of resources) those two problems need to be disconnected from each other.

This can be achieved by providing people with a monthly guaranteed income which they will get regardless of whether they have a job or not. This income must allow them to make a living by providing for the necessities such as appropriate housing, clothing, food & beverages, basic communication, basic health care and some limited leisure. However, such an icome must not be as high as to completly remove any incentive to do work.

Paying people such an income would have additonal social, environmental and economic advantages.
For example, many people will not need to work full time. The need for everyone to commute at the same time is thus removed, which will relieve infrastructures as the loads are spread out.
Many people will choose to work according to their own needs, which will reduce the stress on the workforce considerably. Many ailings and sicknesses will just go away, which will relieve the health-care infrastructure.
People who do not work full time can spend more time with their families, do community work or volunteer to do some things if they chose to do so. This would relieve the stress on families and their budgets, and may also relieve community budget to some degree.