March 2, 2009
Posted: 11:27 AM ET
By James Baker, chief of staff and Treasury secretary for President Ronald Reagan and secretary of state for President George H.W. Bush
Beginning in 1990, Japan suffered a collapse in real estate and stock market prices that pushed major banks into insolvency.
Rather than follow America’s tough recommendation – and close or recapitalise these banks – Japan took an easier approach. It kept banks marginally functional through explicit or implicit guarantees and piecemeal government bail-outs. The resulting “zombie banks” – neither alive nor dead – could not support economic growth.
A period of feeble economic performance called Japan’s “lost decade” resulted.
Unfortunately, the US may be repeating Japan’s mistake by viewing our current banking crisis as one of liquidity and not solvency. Most proposals advanced thus far assume that, once confidence in financial markets is restored, banks will recover.
But if their assumption is wrong, we risk perpetuating US zombie banks and suffering a lost American decade.
Filed under: Economy
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