Congratulations, Charles Grassley. You are now a household name in Japan.
That’s quite a feat for a US senator from Iowa, a place to which few of Japan’s 127 million people would have given much thought. The Republican lawmaker did it by calling on American International Group Inc. (AIG) executives to follow Japanese tradition and “resign or go commit suicide”.
Here Japanese business magnates thought they were known overseas for creating Sony Corp., Toyota Motor Corp. and the “shinkansen” bullet-train. It seems the second biggest economy also conjures up darker images in middle America.
Grassley’s views are a reminder that something bigger has gotten lost in translation: the lessons from Asia’s financial troubles over the last 12 years. Here are three the US clearly hasn’t yet learned.
One, bankers shouldn’t kill themselves—they should just stop getting naked.
The reference here is to a phrase popularized by billionaire Warren Buffett: “It’s only when the tide goes out that you learn who has been swimming naked.” Even as volatile markets remove bankers’ cover, there is still a whole lot of skinny-dipping going on. Concerns abound that banks are masking the magnitude of worthless assets on their books.
At best, the US is where Japan was in 1998. Officials in Tokyo squandered the previous eight years hoping stimulus efforts would boost the economy and save banks from writing off untold numbers of bad loans. Only in 1998 did Japan begin to examine banks’ books to assess the real size of the debt.
The Obama administration’s new plan to remove toxic assets from banks’ balance sheets is going over well on Wall Street. President Barack Obama and treasury secretary Timothy Geithner deserve more time to fix highly complex faults that were 20 years in the making.
Their trust in the honesty and competence of bankers is all very pre-1998 Japan. A more hands-on, show-us-your-books-now approach is needed. Only then will the White House know the true extent of the crisis, and which bankers are hiding what.
It took Japan about five years to regain control over its financial system after the Asian crisis. It’s also worth noting that even today banks are reluctant to meet Japan’s credit needs. Getting America’s bankers to fess up now is a priority.
Two, start firing people. The trouble with putting off the nationalization of banks is that it delays getting rid of the executives who helped create this mess. Also, AIG’s argument that it needs to retain the best and brightest with big bonuses is bunk. Look no further than Thailand and South Korea.
The wisest thing Thailand did to recover from the 1997 Asian crisis was to close or consolidate banks and toss out management. Korea took similar steps, which allowed the government to grasp the depth of its banking woes. The arrival of outsiders began the healing. Officials in Seoul also worked to rein in the opaque, family-run conglomerates towering over the economy.
Trusting AIG’s or Citigroup Inc.’s management—or those of other troubled institutions—is like failing to realize why your star trader never takes a vacation. Only when he’s out for a few days can you see the investment losses he may be hiding. Rogue traders Nick Leeson and Jerome Kerviel weren’t workaholics; they were concealing dodgy dealings.
Indonesia’s experience is telling. Like AIG, Indonesian bankers argued that their investments were so complex that only their team could unwind them. The upshot is that it was slower to shake up its banks. In one infamous case, a son of then-president Suharto merely changed the name of his troubled bank and kept operating. It’s no coincidence that Indonesia’s recovery was slower than Thailand’s or Korea’s.
Troubled companies sometimes need to make a clean break from the managers who oversaw their destruction. Government help should come with latitude to dump management. Or, as Grassley argues, they should resign. It happened in Asia, and it needs to happen in the US, too.
Three, crises really are opportunities. Obama is getting considerable grief for focusing not only on the economy, but on other complicated areas such as education, energy, health care and immigration. If only Asia had done just that.
If Japan spent more of the money it wasted building roads and bridges to nowhere creating a safety net for unemployed workers, it would be better off today. If Korea and South-East Asia invested more in encouraging entrepreneurship and weaning economies off exports, growth would be stronger.
In the US, health care costs helped drive General Motors Corp. into the ground. Failure to get more for its education buck is making the US less competitive. Half-hearted efforts to increase energy efficiency are undermining the economy at the worst possible time. Post-11 September immigration policies are keeping out some of the workers the US needs. These issues are more related than many people would first think.
The reason Asia’s fortunes are now darkening is a failure to pursue multipronged retooling efforts after the 1990s. The US needn’t make the same mistake. It can avoid it by studying Asia’s recent past.
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