[Rhodes22-list] Political- Caroline's disappointing day.

[Brad Haslett]

Herb,

Along that line of thinking, here's another article pointing out our
folly.  So far, I've only heard one single politician point out the
obvious, Sarah Palin "live within your means".  Now that oil has
dropped from $140 a barrel to $40, her restraint on vastly increasing
the size of the AK budget looks pretty damn prescient. The NYTimes
should be writing an article about it any day now.

Run the world for me, will ya?  I've got to go suffer through training
today as the whippee not the whippor.

Brad

------------------------

Return of the Living Dead
What the U.S. can learn from Japan's failed experiment with "zombie businesses"

Anthony Randazzo | December 17, 2008

Killing zombies isn't typically the responsibility of America's
president or treasury secretary. But if the country is going to get
through the current financial crisis, President-elect Barack Obama and
his economic team better get out their shotguns and aim for the head.

Today, our economy is plagued by struggling markets, liquidity
concerns, and frozen credit. Twenty years ago, Japan faced nearly the
exact same problems. Then they fell prey to the zombies.

After Japan's asset bubble burst in the late 1980s, their economy took
a sharp downturn, prompting government officials to try bailing out
banks and investing in infrastructure, much like the activity and
proposals floating around America today. The results were terrible.

With the government propping up poor business models rather than
allowing further job losses, firms wound up operating over the
long-term without making a profit or adding any value to society.
Their utter lack of vitality earned these perpetual money-leaching
entities the moniker "zombie businesses." And unless American
policymakers understand the failures of the Japanese response, we will
suffer the same zombie fate.

Remember that the Japanese asset bubble and the American housing
bubble have eerily similar origins. Both were driven by aggressive
behavior in financial institutions. Wall Street, which sought new ways
to get quality returns on investments, turned to securitizing
everything it could and issuing unwise subprime mortgages—all highly
valued by the rating agencies, and all highly misunderstood. The
Japanese aggressively pursued real property assets to the point where
the inflated values were unsustainable.

In both cases, the rapid rise in rates of return led to over
confidence. In Japan, it is said that the market experienced a sense
of euphoria, and poor investments were driven by excessively
optimistic expectations of future economic development.

The Nikkei, Japan's stock index, rose from 18,000 in 1986 to an
intraday high of 38,975 by the end of 1989. Similarly in the U.S., the
Dow Jones went from 7,591 in July 2002 to an intraday high of 14,115
five years later.

These large growth trends led to inadequate risk management,
over-leveraged investments, and depleted capital reserves. In both
bubbles, loans were given out like candy, often times to people that
the banks knew were high risk.

Government practices during both bubbles share many unfortunate
similarities as well. In Japan, increased capital requirements caused
many firms to struggle when their assets started to depreciate.
Similarly, the inflexible mark-to-market regulations in America forced
firms to raise capital quickly, sometimes driving them towards
bankruptcy.

In America, Federal Housing Administration policies encouraged the
expansion of subprime mortgages, particularly through Fannie Mae and
Freddie Mac. The idea was to expand homeownership for low-income
families, though the increased demand drove housing up until the
market was eventually oversaturated. Japanese regulatory policies and
tax codes also caused land prices to unnaturally rise until they
ultimately burst.

Given these similarities, U.S. officials should take a careful look at
how Japan's response to the crisis lead to the more than ten years of
recession and stagnation known as "the lost decade." We do not want to
duplicate Japan's mistakes.

First mistake. The Bank of Japan tried to ease economic pains during
their downturn through the 1990s by loaning large amounts of money to
businesses. However, such attempts to recapitalize the market were
counteracted by underlying management problems endemic to the dying
firms.

According to Shigenori Shiratsuka, Deputy Director and Senior
Economist at the Bank of Japan, even though firms became unprofitable,
the government still encouraged lending to them to prevent losses from
materializing. There were heavy concerns about a failing firm
increasing unemployment.

The intense lobbying from special interest groups representing various
sectors of the Japanese economy further perpetuated these ill-fated
loans, funneling additional funds to zombie businesses. As Shiratsuka
notes, "under such circumstances, loans to unprofitable firms become
fixed and funds are not channeled to growing firms, holding down
economic activity."

Unfortunately, we're seeing a disturbingly similar trend in America
today, as the cost of bailing out AIG continues to rise and Congress
moves forward with a bailout for the auto industry. The $8.4 trillion
(and growing) cost of "saving" firms deemed too big to fail completely
ignores the inefficiency and poor quality of the very businesses the
government is trying to save.

Second mistake. With all those loans, the Japanese government was
simply too integrated into the market to have adequate incentives to
create the right policies. Daniel Okimoto, former director of the
Asia-Pacific Research Center, points out that the interests of Japan's
economic bureaucracies, such as the Ministry of Finance, became
interdependent with the banking industry.

Moreover, government officials suppressed data revealing the intense
scope of the economic malaise, all while regulations were developed
with government interests in mind. Transparency and public
accountability were basically nonexistent.

America now finds itself in the same position. The Treasury has taken
equity stakes in many major financial institutions and insurance
companies, not to mention the pending partial nationalization of
Detroit's Big Three. This has created a myriad of conflicting
interests as well as vast potential for fraud.

Consider that while the bulk of what the Treasury, FDIC, and Federal
Reserve have spent has been tracked, it's far from clear what the
banks and other institutions have done with that money. Without this
information, it's difficult to measure whether the $8.4 trillion has
been effective. Fighting fraud is equally difficult.

Third mistake. The length of Japan's asset deflation, recession, and
liquidity struggles has been blamed largely on the lack of foresighted
policies and political leadership. Politicians bent on retaining their
power took action that sought to solve the present day concerns, such
as infrastructure projects, without regard to their long-term effects.
As a result, economic growth was not sustained.

America suffers from a similar vision problem. Intent with avoiding
any semblance of economic pain, federal officials have thrown moral
hazard and laissez-faire principals to the wind. Creative destruction
has been rejected, despite long historical proof that it is the best
way for an economy to grow.

Fourth mistake. Japan tried to climb out of its economic mess by
raising taxes and cutting interest rates. Okimoto cites a series of
policy mistakes in a report on Japan's economic stagnation that
includes a consumption tax hike, business taxes, and heavy-handed
reliance on interest rate cuts that reduced investment incentives.

President-elect Obama has backed down temporarily on his oil industry
windfall profits tax and his promise to end the Bush tax cuts. But he
still plans on letting the Bush tax cuts expire in 2010 and has set an
arbitrary cap of $80 per barrel as the most profit oil companies can
make before a windfall tax.

Neither Obama nor Congress has seriously considered cutting business
taxes, cutting capital gains taxes, or creating an investment tax
holiday. Any of these would encourage capital investment and the
growth of businesses, thereby spurring on an economic recovery.
Meanwhile, the Fed continues to slash interest rates with the goal of
encouraging lending today, thereby limiting investment rates of return
over the long-term.

Fifth mistake. With the Japanese government enabling lending to zombie
businesses, taking cash away from productive ventures, and passing tax
laws and other regulations that did not promote growth, the private
sector was actively discouraged from investing.

Japan's economic growth during the 80s was due in large part to
consumption growth and heavy capital investment. However, during the
90s, that money dropped-off as savings increased due to uncertainty,
leading to a sharp drop in demand that further hurt prospects for
recovery. The same problems contributed to the flight of foreign
capital from Japan as well.

To counteract the lack of private investment, the Japanese government
turned to large-scale infrastructure programs. They built roads,
bridges, and airports, all with the goal of creating jobs and saving
the economy. But it didn't work. Public debt skyrocketed (it is now
higher than GDP), unemployment doubled, and the economy remained
stagnant.

While private sector investment isn't totally stalled in America
today, there is great uncertainty about what the government will do
next, whether taxes will increase, and what future rates of return
will be considering the Fed's rate-slashing binge. Foreign investment
dollars are slowing as well, partially due to the global economic dip,
but also because of errant policy.

To make matters worse, Obama is planning a Japanese-styled
infrastructure investment project, with the goal of restarting the
economy and creating 2.5 million jobs. But the plans are unlikely to
encourage long-term economic growth, the jobs are not sustainable, and
the spending will increase national debt.

And while some of Japan's infrastructure projects have served society,
that value must be compared to what the private sector could have
created with economic policies in place that encouraged free market
activity. In other words, what are the unseen losses?

Still there are reasons to be optimistic. Not only does America have
the Japanese lesson to study, we are in a much better position to act
than Japan ever was. Despite Wall Street's massive losses, for
instance, there is over $100 billion in private capital available now
for investing in infrastructure. With a little forward thinking, we
can unleash the greatest new wave of investment this country has ever
seen-one that originates from the private sector, not from government
planners focused on propping up the living dead.

Anthony Randazzo is a research associate at the Reason Foundation.

On Thu, Dec 18, 2008 at 8:22 AM, Herb Parsons <hparsons at parsonsys.com> wrote:
> I think next time I overspend (and that would be NOW, it's Christmas you
> know), I'm going to take a new approach.
>
> Rather than look for ways to cut back here and there to make up for my
> earlier weaknesses, I'm going to simply approach my boss and tell him he
> has to give me more money.
>
> Think it'll work?
>
> Of course, my boss can say no. But, I DO have access to payroll files.
> On the other hand, if I did that, he'd probably fire me.
>
> Maybe the public should learn from THAT!!!!
>
> We're the "boss" in these things, we need to start firing people.
>
> Michael D. Weisner wrote:
>> Brad,
>>
>> The appointment of an interim Senator seems to be the least of the problems
>> facing New Yorkers or those from the great state of Lincoln.  Have you heard
>> what our esteemed governor David Patterson is proposing?  While fiscally
>> responsible, I doubt that it will stimulate the NY economy, rather much the
>> opposite.  My favorite line in his recent address discusses how the NY
>> budget could increase from 8 billion dollars to nearly 16 billion dollars in
>> the last two months!  Come on, how many hands are in my pockets now?
>>
>> Be careful with the placement of and references to your pronouns - I'd hate
>> to see your folks doing time for being pissed, although it might be all
>> together possible in Chicagoland.
>>
>> Mike
>> s/v Shanghaid'd Summer ('81)
>>        Nissequogue River, NY
>>
>> From: "Brad Haslett" <flybrad at gmail.com>Sent: Thursday, December 18, 2008
>> 8:06 AM
>>
>>> Mike,
>>>
>>>
>> {clip}
>>
>>> Seriously, if I lived in NY I'd be pissed that this was being crammed
>>> down my throat, just like my parents in downstate Illinois are pissed
>>> that once again, a handful of Chicagoans will decide who their next
>>> Senator will be - provided of course they don't go to jail first.
>>>
>>> Brad
>>>
>> {clip}
>>
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>>
>>
>
> --
> Herb Parsons
>
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