Latest from Andy Xie

[maprea]

http://english.caijing.com.cn/2009-09-16/110251471.html

[Verrocchio]

Re: Latest from Andy Xie

The entire article is worth reading (and it's not lengthy). Below are the two paragraphs that I thought were most relevant:

We can learn much from Japan's experience. The global economy -- mainly the Anglo-Saxon economy -- is facing the consequences of a massive credit bubble. The remedies most governments have embraced are to keep interest rates low and fiscal deficits high. These are the same policies Japan pursued after its bubble burst nearly two decades ago. How today's bubble economies are treating bankruptcies and bad debt is shockingly similar to what was seen in Japan. The United States and others have suspended mark-to-market accounting rules to let banks stay afloat despite large amounts of toxic assets. It's the same "let them earn their way back" strategy that Japan pursued. The strategy fails to work because it keeps an economy weak, limiting the earning power of financial institutions.

As the global economy is again showing signs of growth in the third quarter, most governments are celebrating the effectiveness of their policies. Yet Japan's experience forces us to pause: Its economy experienced many such growth bounces over the past two decades, but was unable to sustain any of them. The problem was Japan only used stimulus, not restructuring, to cope with the bursting of its bubble. After the demise of any big bubble, serious structural problems that hamper economic growth remain. Stimulus can only provide short-term support that makes structural reform possible. When policymakers celebrate the short-term impact of stimulus and forget structural reforms, economies slump again. I think the Anglo-Saxon economies will dip again next year.

Andy is saying that Bernanke's actions are likely to produce the same results that were seen by the Japanese.

[GRG55]

Re: Latest from Andy Xie

The entire article is worth reading (and it's not lengthy). Below are the two paragraphs that I thought were most relevant:

We can learn much from Japan's experience. The global economy -- mainly the Anglo-Saxon economy -- is facing the consequences of a massive credit bubble. The remedies most governments have embraced are to keep interest rates low and fiscal deficits high. These are the same policies Japan pursued after its bubble burst nearly two decades ago. How today's bubble economies are treating bankruptcies and bad debt is shockingly similar to what was seen in Japan. The United States and others have suspended mark-to-market accounting rules to let banks stay afloat despite large amounts of toxic assets. It's the same "let them earn their way back" strategy that Japan pursued. The strategy fails to work because it keeps an economy weak, limiting the earning power of financial institutions.

As the global economy is again showing signs of growth in the third quarter, most governments are celebrating the effectiveness of their policies. Yet Japan's experience forces us to pause: Its economy experienced many such growth bounces over the past two decades, but was unable to sustain any of them. The problem was Japan only used stimulus, not restructuring, to cope with the bursting of its bubble. After the demise of any big bubble, serious structural problems that hamper economic growth remain. Stimulus can only provide short-term support that makes structural reform possible. When policymakers celebrate the short-term impact of stimulus and forget structural reforms, economies slump again. I think the Anglo-Saxon economies will dip again next year.

Andy is saying that Bernanke's actions are likely to produce the same results that were seen by the Japanese.

Generally one would expect this to be the case...but I do take exception to the statement "...The strategy fails to work because it keeps an economy weak, limiting the earning power of financial institutions...".

The US banking system is benefitting from what will prove to be a near-permanent subsidy from taxpayers in the form of "zero cost" money that they are then redeploying further up the Treasury yield curve to earn luscious risk-free profits...and pay themselves handsome compensation for their efforts. There is no apparent limitation on the earning power at the moment. :rolleyes:

I say "near-permanent" because I see no way that the Fed can get out of this trap. Just like Japan, once the banking system becomes addicted to the risk-free profit drug the pain of withdrawal becomes politically untenable. The Fed seem destined to be forced to maintain ZIRP for a very lengthy period of time.

[WildspitzE]

Re: Latest from Andy Xie

http://english.caijing.com.cn/2009-09-16/110251471.html

I think j/k posted this here:
http://www.itulip.com/forums/showthread.php?t=11923

[jk]

Re: Latest from Andy Xie

Generally one would expect this to be the case...but I do take exception to the statement "...The strategy fails to work because it keeps an economy weak, limiting the earning power of financial institutions...".

The US banking system is benefitting from what will prove to be a near-permanent subsidy from taxpayers in the form of "zero cost" money that they are then redeploying further up the Treasury yield curve to earn luscious risk-free profits...and pay themselves handsome compensation for their efforts. There is no apparent limitation on the earning power at the moment. :rolleyes:

I say "near-permanent" because I see no way that the Fed can get out of this trap. Just like Japan, once the banking system becomes addicted to the risk-free profit drug the pain of withdrawal becomes politically untenable. The Fed seem destined to be forced to maintain ZIRP for a very lengthy period of time.

i remember having these issues a decade or three ago, maybe during the '81-82 recession, or after the s&l or the peso crisis. can't keep the crises straight anymore, but anyway, i've seen this movie before. since, as grg says above, there is no apparent limitation on the banks' "earning"* power at the moment, the banks will eventually recapitalize themselves under this regime. as that occurs they will gradually become more aggressive in their lending, and so on.


*"earning" in quotes because it's really a fairly transparent give-away, siphoning money from the treasury to the banks.