Is US entering Japan's nightmare?

[Adhesive]

http://articles.moneycentral.msn.com/Investing/JubaksJournal/IsUSEnteringJapansNightmare.aspx

Japan's bust started with a real-estate boom, lax lending and the propping up of financial firms -- and its recovery took a decade, says MSN Money columnist Jim Jubak. The Fed's rate cuts keep the US on the same path.

[amdg]

Different ground conditions, I think. So I wouldn't be too worried.

But as always, prepare for the worst. Aren't I a little ray of sunshine this morning.

[Mulboyne]

Richard Katz of the Oriental Economist has a piece in the WSJ today where he rejects the comparison. You need a subscription to read it but, in summary, he says that the magnitude of the two crises are different. Estimates currently suggest that the housing crisis will cost $250 billion which is 2% of US GDP. Katz says that even a doubling of that estimate still leaves it short of Japan's writedowns which were around 20% of GDP. He also says that US house prices rose 200% from 1996-2006 while Japan saw a rise of 500% from 1981-1991 and subsequent fall to 1981 levels. Again, if forecasts are right that that US house prices fall only 30%, then that would take them back to 2000 levels, nowhere near 1996 and a long way from 1986. Katz also believes that actions to deal with the subprime fallout have been much swifter and comprehensive than anything Japan's policymakers managed. He admits that things could get worse but points out that they would need to get substantially worse to come close to Japan's problems.

[FG Lurker]

Mulboyne, thank you for posting that.

If someone (me, in this case) wanted to subscribe to one publication to get good insight into the world economy, what would you suggest?

[Catoneinutica]

Richard Katz of the Oriental Economist has a piece in the WSJ today where he rejects the comparison. You need a subscription to read it but, in summary, he says that the magnitude of the two crises are different. Estimates currently suggest that the housing crisis will cost $250 billion which is 2% of US GDP. Katz says that even a doubling of that estimate still leaves it short of Japan's writedowns which were around 20% of GDP. He also says that US house prices rose 200% from 1996-2006 while Japan saw a rise of 500% from 1981-1991 and subsequent fall to 1981 levels. Again, if forecasts are right that that US house prices fall only 30%, then that would take them back to 2000 levels, nowhere near 1996 and a long way from 1986. Katz also believes that actions to deal with the subprime fallout have been much swifter and comprehensive than anything Japan's policymakers managed. He admits that things could get worse but points out that they would need to get substantially worse to come close to Japan's problems.

Big Daddy isn't the only bubblicious country:



Pretty astounding. Look for more Northern Rock-style bank nationalizations - and cheaper prices in France, Spain, Italy, Greece, etc., as British equity locusts pack up and head back to Old Blighty.

[nottu]

[SgtBeavis]

I think another big difference between the Japan's bursting bubble and the current crisis is that Japan was extremely slow to accept reform in its banking system. That slowed their recovery by several years.

As for my personal situation, I'm fortunate to live in the Dallas, TX area where homes were not overpriced to begin with. Also my wife and I bought the cheapest house in our neighborhood. We were also very conservative in our financing getting a low rate but avoiding those stupid ARM loans.

Still that doesn't prevent my Mother In Law in Hadano, Japan from calling once a week. She's worried my wife and I will lose our house in this sub prime fiasco. My poor wife has to constantly explain to her why we aren't at risk of losing our home..

[Mulboyne]

If someone (me, in this case) wanted to subscribe to one publication to get good insight into the world economy, what would you suggest?

I think you have to be something of a magpie when it comes to collecting information. I don't think reading only the WSJ, FT, Barrons, Forbes or The Economist is going to give you more than a familiarity with the topics of the day. They all have something thought provoking from time to time but they are essentially "noise" - they are primarily useful as a guide to what everyone else is thinking.

For more off-the-wall analysis, I like Marc Faber's monthly "Gloom Boom & Doom Report" but it will set you back $200 for a year's subscription. There are some sample articles online. Grant's Interest Rate Observer is pricier still but also has some gems as does Fred Hickey's High Tech Strategist. The caveat is that this input only really has an impact if you have the background noise turned on.

Online, I usually try to collect information on global economics the way I collect information on Japan: build up dozens of bookmarks and try to remember to visit them all from time to time. I don't use RSS feeds because I prefer the randomness of just clicking around when I get a free moment and seeing where it takes me.

[Mulboyne]

[pheyton]

[Buraku]

A failure of U.S. mortgage finance companies Fannie Mae and Freddie Mac could be a catastrophe for the global financial system, said Yu Yongding, a former adviser to China's central bank.

http://www.bloomberg.com/apps/news?pid= ... refer=asia>

``If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic,'' Yu said in e-mailed answers to questions yesterday. ``If it is not the end of the world, it is the end of the current international financial system.''

[Mulboyne]

Richard Katz has reiterated his viewthat the crises of Japan's bubble and today's America the US are qualitatively different:

Every time the US undergoes a bubble and bust, doomsayers make comparisons to Japan. Remember all those fancy charts back in the dot.com days showing how US stocks (the NASDAQ, I believe) mirrored the Nikkei during Japan's bubble and bust. And yet the 2001 US recession was the mildest in the postwar era. In my view, these comparisons are false on the following grounds:

1) Crises: financial and real

Most modern mature economies are surprisingly resilient even in the face of large financial shocks. Take 2000-2003, when the loss of wealth from America's stock market crash added up to a stunning 90% of US GDP. That dwarfs the 60% loss in the two years following the infamous crash of 1929. And yet, as noted above, the recession of 2001 was the mildest of the entire postwar era. For a financial shock to severely damage a modern economy for an extended period of time, that economy has to be vulnerable due to deep-seated structural flaws. Japan was the poster child for this malady.

2) The source of the crisis: structure vs. policy errors

Japan's economic flaws were woven into the very fabric of its political economy. While international firms like Sony and Toyota excelled, the vast majority of Japan's domestic economy was kept woefully inefficient by regulations and pervasive anti-competitive practices designed to protect the weak. The authorities responded to a structural shortfall of consumer income and demand by using monetary steroids to feed investment in unneeded plant and equipment. Both of these trends were reinforced by a dysfunctional banking system. The end result was a mountain of bad debt and "white elephant" factories, stores and offices.

By contrast, America's subprime fiasco resulted from correctable policy mistakes: mainly letting non-banks issue mortgages without having to heed the regulations applied to banks, such as requiring both a downpayment and proof of ability to pay back the loan. Former Federal Reserve chair Alan Greenspan refused to use the greater regulatory powers granted to him by Congress. Today, both the Congress and the new Federal Reserve chair Ben Bernanke are moving to correct these mistakes. Adding fuel to the fire, the tax code and stock option compensation system provided incentives to financial executives to take excessive risks with other people's money. Unfortunately, this problem is not being addressed.

3) The magnitude and scope of the crisis

As for the magnitude of crisis, there is no comparison. Most analysts believe the US housing crisis will cost about 3-4% of US GDP, although these estimates could rise as time goes on. The higher figure equals the size of the Savings & Loan crisis of the early 1990s. And yet, the 1990-91 recession was the second mildest downturn of the postwar era. By contrast, in Japan's banking crisis, total write-downs of NPLs amounted to a mammoth 20% of GDP.

Over the ten years prior to the 2006 peak, US housing prices in the 20 biggest cities rose by almost 200%. In the ten years prior to Japan's 1991 bust, commercial land prices in its six biggest cities rose by almost 500%. The subsequent bust not only erased all of that gain, but brought Japanese prices down to 25% below 1981 levels. Most forecasters think US housing prices will drop 30% from their peak, leaving them well above levels at the beginning of the boom.

While Japan's ills penetrated almost the entire economy, most of today's problem in the US is focused on subprime adjustable rate mortgages (ARMs), which account for only 7% of all mortgages. 11% of all subprime ARMs are now in foreclosure, but among prime fixed rate mortgages, which account for 65% of all mortgages, the foreclosure rate is only 0.55% so far.

Despite all the talk of credit crunch, so far the US has not experienced anything more severe than the deceleration of credit that typically accompanies a recession. While interest rates have risen for risky assets and some narrow credit markets have seized up from time to time, ordinary bank loans for business and consumers are still expanding at a healthy clip. Total bank credit today is 8% higher than it was a year ago. By contrast, in Japan, total bank loans fell 25% from 1996 through 2007.


4) Policy response

US policymakers and financial institutions are responding far more quickly and aggressively than in Japan. Behind Japan's slow response was the fact that the pervasive structural defects made many of the needed solutions quite painful. For example, one reason that Tokyo took so long to resolve its nonperforming loan (NPL) crisis was because "zombie firms" provided "disguised unemployment" for millions of workers. By contrast, the US has much more room to maneuver. The government is applying fiscal stimulus equal to 1% of GDP, financial institutions are rapidly writing off bad assets while seeking new capital, Congress is working on mortgage relief plans, and, most importantly, the Federal Reserve is acting aggressively to forestall a credit crunch.

While there were certain mistakes in macroeconomic policy during Japan's "lost decade," the fact is that Japan's structural vulnerability made macroeconomic stimulus far less potent than in a healthier economy. By contrast, the US is capable of responding well to stimulus.

[Catoneinutica]

Thanks Mulboyne for posting Katz's reply; I was going to post it myself. I found his argument much more compelling than that of The Economist. Guess in this case, the Far Eastern Economic Review trumps Bill Gates' favorite business magazine.

[pheyton]

Mulboyne, whose figures are we to believe?

We have already seen a 30% drop in the value of real estate and it is continuing. My friends are all in TI & RE, as I use to be in title insurance too so I speak with some understanding of the RE market. The market is continuing to decline and will do so into next year. So there is no telling how much more home values will drop.

That brings us to a uniquely American problem, savings vs. spending. As we know America has a negative savings rate. On top of that many people are becoming upside down in their mortgages. If prices decline another 10-20% will defaults begin to multiply? The economy of the home ATM, credit cards and consumerism is dead and so are the hopes that this will be a mild recession.

We may not be in the same situation as Japan, but I would say in a way we are in a worse one. Our national debt is approaching $10Trillion. Almost 70% of GDP if you believe the WH numbers, which I don't. Our savings rate is negative. Our manufacturing base has been shipped abroad. Our sciences have suffered under Bush while other countries have taken then lead.

I think that we can correct everything, but it will take colossal steps. Alternative energies, re-regulation of Banks, heavy investment in science, engineering, and infrastructure, reduction in the military budget and re-taxing the wealthy and corporations. I'm skeptical Americans can take on these tasks though.

[Charles]

My friends are all in TI & RE, as I use to be in title insurance too so I speak with some understanding of the RE market.

Are these guys some of your colleagues? (hint: say the firm's name aloud).

[nottu]

[Kuang_Grade]

For all the hype about this, so far, what has been going on as of late is much, much milder than anything that happened in the late 70's/80's when I was growing up...People are tightening up on their spending but people still have money...they might not be buying premium beer anymore, but they are still buying beer. Housing prices are down a bit some place, down alot in others depending on the specific marketplaces...in the places where things were terribly overbuilt, they've fallen into a deep hole, but most of the losses there are being felt by speculators or people who really shouldn't have been trying to own a house in the first place...I thought my local market was overpriced from about 2000 and I was amazed that it kept going up and up for another 5 or so years.....At parties, alot of people looked down their noses at me when I said the prices weren't sustainable in the long run, even when I pointed out that if they had to buy their current property at current prices, it was unlikely they couldn't afford to do outside of some high risk approaches like interest only payments or forking over 70% of their post tax income towards house payments. So some folks are getting their teeth smashed in by this, but a vast majority most people are not, even though many people are worried.

While there are many levels to this, one way that US situation is different than Japan in the 90's is personal bankruptcy laws are significantly different in the US than in Japan, so large sections of society are not being economically being taken out of the system for decade or so...actually, some credit markets in the US like people who have gone bankrupt, because that means they can't file for bankruptcy for another ten years...so they know they can hound those folks for a long time to get their money and then some, while someone with an excellent credit score who look great on paper today but could go bankrupt tomorrow with zero warning. So while some folks in the US might be wiped out today, they can start up fresh again and not dragged down by decade old debts like people were in Japan.

And the fact that the national savings rate is negative isn't specifically bad in itself...it could mean the people simply have better things to do with their money than sticking it a bank or likewise they are liquidating cash assets...given that a large and growing part of society is at/or nearing retirement age, this isn't surprising...older people tend to have more assets in cash related products vs. younger folks who, until recently, have likely been pouring spare cash into the housing or stock markets, neither of which would be reflected in the national savings rate. But that said, it isn't something you want to stay negative for decades at time.

[Mulboyne]

Katz has been asked if he still holds his earlier opinion:

Fair question. The short answer is yes. Of course, no sensible person would claim certainty in the current situation, but here is my best judgement.

I think the US situation resembles not so much Japan's long malaise but the Asian financial crisis of 1997-98 (in nature but not in scale). In the Asian crisis, mistaken policies led to a financial crisis which then turned into investor panic. Horrible mistakes turned that panic into economic depressions. In the US case also, bad policies have led to financial crisis and investor panic. Fortunately, the US has not imposed on itself the same disastrous macroeconomic policies which it helped impose on Asia. So, we have a big disconnect in the US:. On the one hand, a big financial crisis. On the other, an economic downturn that, at least so far, is rather mild. But this should not strike us as impossible. We saw the same thing at the beginning of the decade. In the dot.com bust, we had a huge loss of financial wealth, but the mildest recession of the postwar era.

Today, GDP is still growing, though less so than before. The job loss of the last nine months have been only half as much as in the same period of the 1990-91 recession and a two-thirds less than 2001 recession. And most US economists expect that trend to continue, though Japanese economists tend to be more pessimistic.

Out of 55 economists surveyed by the Wall Street Journal in early September before the latest episode, none forecast negative growth for 2008 and only one forecast negative gorwth for 2009. Only ten though 2009 would be worse than 2008. The average forecast was for 1.9% growth in 2009. Not great, but hardly a disaster. We'll have to see if these forecasts are revised downward--and by how much--when the next survey comes out in early October.

My great fear is that, if oil prices remain high, the recovery could be weaker and more prolonged than currently expected.

Another big difference between the US and Japan is that, in the US, the balance sheets of nonfinancial firms remain very strong. Their net worth is 1.3 times their liabilities. By contrast, when Japan's real estate bubble popped, it occurred at a time when nonfinancial corporations had big debts and had themselves invested in a lot of real estate (zaiteku). So, the US has a greater ability to absorb a financial shock than did Japan.

And US policymakers are being aggressive about trying to deal with the problem. When something doesn't suffice, they take additional, stronger steps. We can argue about the wisdom of their steps, but the denial factor is a lot weaker in Washington than it was in Tokyo.

So, saying the US crisis is in a totally different ballpark from Japan is not a plea for inaction. But it is a caution against undue panic. BTW, I made the same call against undue panic regarding Japan in 2003 when so many analysts were predicting a run on the banks and the JGB yields fell to the floor. So, I'm against undue panic whether we are talking about the US or Japan. As for due panic, well...

For anyone in New York, he also mentions a panel discussion on the matter. The rest of us will have to go for the podcast:

"Outlook for the U.S. Economy: Distilling the Credit Crisis and Lessons from Japan" will be the topic of an October 2 panel discussion at the New York Japan Society during 12:00-2:30 pm.. I will be one of the panelists.

The Japan Society will be podcasting the event later that day at
http://www.japansociety.org/corporate_event_podcasts. For those in the NYC area who wish to attend, contact Chris Poston at cposton@japansociety.org.

[kamome]

For anyone in New York, he also mentions a panel discussion on the matter. The rest of us will have to go for the podcast:

"Outlook for the U.S. Economy: Distilling the Credit Crisis and Lessons from Japan" will be the topic of an October 2 panel discussion at the New York Japan Society during 12:00-2:30 pm.

The Japan Society will be podcasting the event later that day at
http://www.japansociety.org/corporate_event_podcasts. For those in the NYC area who wish to attend, contact Chris Poston at [email="cposton@japansociety.org"]cposton@japansociety.org[/email].

If any New York FGs are interested in going to the Japan Society in New York to see this panel discussion, send me a PM. This looks interesting.

[Buraku]

Here's what W thinks

[yt]a99G33ki3bA[/yt]

many think federal intervention is going to happen

Ok I'm not really going to predict much because yesterday I said the Yen would be beat down while TFG points out I was wrong but Nikkei could be down by one percent today

[pheyton]

I guess this is the thread we should use for the US meltdown. Some news:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aLxCHDTaOaWw&refer=home

Sept. 25 (Bloomberg) -- JPMorgan Chase & Co., the third- biggest U.S. bank by assets, agreed to acquire the deposits of Washington Mutual Inc. for $1.9 billion as the thrift was seized by regulators in the biggest bank failure in U.S. history.

The U.S. government closed Seattle-based Washington Mutual amid customer withdrawals of $16.7 billion since Sept. 15, the Office of Thrift Supervision said in a statement. WaMu had ``insufficient liquidity'' and was in an ``unsound'' condition, the OTS said.

http://tinyurl.com/3uwzvn

SAN FRANCISCO (MarketWatch) -- China's government moved to calm financial markets Thursday and denied a report that it had ordered mainland banks to curb lending to U.S. banks, a day after rumors of financial stability led to a run on a Hong Kong institution.
The China Banking Regulatory Commission moved to quash a South China Morning Post report Thursday that said Chinese regulators have told domestic banks to stop interbank lending to U.S. financial institutions.

and from our German friends,

http://www.iht.com/articles/ap/2008/09/25/business/EU-Germany-Financial-Turmoil.php

BERLIN: Financial meltdown on Wall Street could reorder the world economy and cost the United States its status as the world's financial superpower, Germany's finance minister said Thursday.

Finance Minister Peer Steinbrueck told federal lawmakers that the collapse of storied U.S. banks and financial firms such as Lehman Brothers would leave "deep marks" on the world economy.

"The United States will lose its status as the superpower in the world financial system," Steinbrueck said. "The world financial system will become more multipolar."

Add this to the news that the bailout is stalled in Congress as of Thursday night.

[Buraku]

Will the Fed's Rate Cut Help? The Japan Lesson

http://www.time.com/time/business/article/0,8599,1854922,00.html



prepare for a second global subprime meltdown

[Doctor Stop]

A Second Mortgage Disaster On The Horizon?

http://www.cbsnews.com/stories/2008/12/12/60minutes/main4666112.shtml

[Charles]

[GuyJean]

.. by Nobel Laureate Paul Krugman

An interesting podcast from a couple weeks ago..

Daniel Gross talks with Paul Krugman, author of The Return of Depression Economics and the Crisis of 2008.

http://media.slate.com/media/slate/Podcasts/bigmoney/TBM08120201_book_krugman.mp3

from Big Money..

GJ

[Buraku]

Europe is also fucked


New British Bailout Adds $147 Billion

http://www.nytimes.com/2009/01/20/business/worldbusiness/20ukbanks.html

The government of Prime Minister Gordon Brown announced on Monday a new bailout for the British financial system that increases its control over lenders, saying it would offer banks insurance on troubled assets and take other measures to restore credit and support the foundering economy.

[Tsuru]

RBS is only fucked because they were so fucking stupid to gang up with Fortis and Santander and ended up buying the part of ABN Amro riddled with bad American mortgages. Fortis was already fucked because the bit they bought turned out to be too hard to swallow, so that only leaves Santander who so far have come out relatively unscathed from the ABN Amro debacle.

And what did we do? The Dutch state bought back the good parts of ABN at a fraction of the original price. We fucking rule.

[Buraku]

[FG Lurker]

I watched his speech live, it was a rambling mess about just about everything.

Multiple reserve currencies isn't necessarily a bad idea but I'd like to know what additional currencies he suggests. The ruble?

[Mulboyne]

If you want to hear a nightmare scenario for Japan, Carl Weinberg has one for you in this video. He starts talking about Japan 3 min 35 secs into the clip.