Financial Times – June 21 2009
http://www.ft.com/intl/cms/s/0/97d6a490-5e8c-11de-91ad-00144feabdc0.html
Shabu shabu is a simple but delicious Japanese dish in which transclucently thin slices of beef are dipped into a boiling broth of vegetables and tofu. A few seconds will do; just enough for the meat to turn pinky-grey.
In Japanese finance shabu shabu has another set of associations. It is the enduring symbol of the mid-1990s banking crisis. It was at a shabu shabu restaurant in Shinjuku, – staffed by mini-skirted waitresses sans underwear – that top Japanese bankers regularly entertained the ministry officials who were supposed to be supervising them. The entertainment fulfilled its purpose. The men from the ministry turned a blind eye to Japan’s deepening bad loan crisis until 1997, when banks began to implode and the whole system teetered on the brink of failure.
Numerous lessons have been drawn from Japan’s “lost decade,” mostly focussing on technical isues of monetary policy and banking regulation. Less attention has been paid to the political lessons which the Japanese themselves drew from their travails. These cast an intriguing light on the current debate about market failure, the role of government, and the future of capitalism.
In stark contrast to today’s conventional wisdowm in the US and the UK, Japan concluded that its mid-1990s no-panties moment argued for more financial de-regulation, not less; for more shareholder influence over corporate management; for building up domestic financial markets and modernizing the domestic financial industry; even for turning Tokyo into a global fiancial centre, a prospect that remains a gleam in the eye of a few visionary politicans.
Slowly but steadily Japan has walked the talk. In 1998 it introduced the “Big Bang” financial reforms. The effects are still rippling through the Japanese economy today. The recent ouster of the management of wig-maker Aderans by foreign activist investors could never have happened in the pre-shabu shabu era, when managements were sacrosanct and shareholders were expected to close their eyes and think of the national interest.
Meanwhile in the former bastions of financial capitalism we have seen a stunning reversal of once firmly held principles. Government has taken control of major manufacturing companies, using its muscle to re-arrange the interests of creditors and reward favoured client groups. Shareholder rights have been trampled underfoot as bureaucrats and executives have cobbled together politically expedient banking mergers. Poorly conceived shorting restrictions came and went with little attempt at explanation. More seriously in the long-term, respected commentators have started to attack the financial industry in terms suggestive of some kind of criminal conspiracy.
The political and psychological dynamic is easy to see. When a bubble of scale bursts, there is a powerful reaction against the values of the era that spawned it. Almost overnight the institutions and individuals who benefitted the most become villains. Features of the economic system that were once sources of pride become shameful flaws. Opinion-leaders who cheer-led the vanished golden era re-invent themselves as zealous revolutionaries demanding wholesale changes. The public – without whose active and enthusiastic participation no serious bubble gets off the ground – is now angry and scared.
In Japan’s case the narrative of the bubble years was of “socialism that works;” a harmonious greed-less society in which managements planned for the long-term and workers were motivated by company loyalty and the economy was steered by dedicated, astonishingly able bureaucrats. The collapse of the bubble and ensuing financial debacle shattered the “Japan Inc.” myth and cleared the way for a new, pragmatic approach.
In the US and UK, the shatttered narrative was of globalization without tears, boom with no bust, regulatory perfection. What replaces it, apart from feel-good bromides and political stitch-ups? Japan settled on evolutionary change in the direction of greater economic efficiency. The emerging consensus on cutting the financial industry down to size could mean the loss of a powerful competitive advantage and the gravitation of financial services to other centres, perhaps in Asia, perhaps one day to Japan even. With talk of an industrial policy for the UK , there is a risk that the ghost of British Leyland may walk again.
The reality is that historically significant financial crises are caused by the collapse of historically significant asset bubbles, and asset bubbles have occurred regularly throughout history under many kinds of economic system. You don’t need huge bonuses for investment bankers, stock options for managements, manic commentators on financial TV channels, Ayn Rand devoteees at the central bank, weak-kneed rating agencies, repeal of Glass Steagell, etc. We know this because Japan’s Godzilla-sized 1980s bubble lacked all these features.
Changing the system will not abolish bubbles. The next one will occur as soon as the lessons of the last one are forgotten. What has to be considered very carefully is whether wholesale changes produce positive outcomes, as was broadly the case in Japan, or risk making a bad situation considerably worse.