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September 16, 1995
[SSJ: 293] RE US S&L Crisis and Japan's
From: Geoff Miller
Posted Date: 1995/09/16
[Moderator's Note: The "you" referred to below appears to be both Prof. Mike
Smitka and Prof. Ulrike Schaede.]
I was interested in your comments on the Japanese situation. I have just
returned from a summer as a researcher at the BOJ and although my work didn't
focus on the bad loans per se, I did a paper on the role of the central bank in
a bubble economy (e.g., Japan's in 1989-90). Please let me know if you write any
of your coments up in more formal ways.
The remarks on the S&L crisis are interesting also. No one has measured the
"real" cost of the crisis in the US, but actually the true cost in economic
terms is almost certainly lower than the estimated $150 billion outlay in
present value terms. This is because much of the $150 represented above-market
interest payments to holders of insured certificates of deposit -- and this was
a pure wealth transfer with few efficiency effects. The true costs were all the
unfinished condo projects in Houston, etc., plus the very large regulatory costs
that the US banking industry is now incurring, plus all the transaction costs of
the bank failures, etc. Very hard to measure, but still probably lower than the
official out-of-pocket cost.
Cheers.
Geoffrey Miller
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From: hashimori.iwato[atx]iac-online.com (Hashimori Iwato) Date: Fri, 15 Sep 95
>I recall that at the time of the S&L bailout, several economists said that the
damage to the American economy had already been done....
>What about Japan? After all, the Japanese government can print money by selling
bonds to the BOJ. The risk of that is to cause inflation but that hardly seems a
problem in Japan today.
>I don't propose this with much confidence--I am just asking if it makes sense.
So who pays the interest on those bonds? The taxpayer, and that is exactly what
the Japanese public does not want.
Just to give you an example of what the Japanese government is capable.
Recently, I put my usual 100 yen into the ticket machine only to realize that
nothing came out, when I pressed the button. After trying again, I turned to a
young lad standing next to me, who seemed to be having the same trouble with a
different machine. Within a brief period we discovered a sign which informed us
that our ticket price had been raised from 100 yen to 130 yen -- a 30% increase
in public transport fees during a period of negative inflation.
Surely, the Japanese public is not privy to the mechanics of macroeconomics, but
it is wary of what the Japanese government can do, if it sets its mind to it. If
every Japanese were to run to his bank to withdraw his savings, the government
would likely be forced to take drastic measures. This is something the Japanese
public fears.
It should be pointed out that the majority of Japanese savings are not held in
private banks; rather, they are held in postal savings accounts, which are
strictly controlled by the government. Just recently, the postal deposit rate
has been lowered; already the Japanese consumer is beginning to feel the pinch.
Moreover, because postal deposit rates are very low, and because there exists
near zero or negative inflation, the cost of holding money is also close to
zero. If the Japanese consumer were to remove his savings from a private bank,
he might just hold onto it, rather than deposit it again into a much safer
postal savings account. This would dry up the money available for new
investment, and raise the cost of investment to producers.
No, you are right. Higher inflation is not likely to be a problem in the near
future; rather, decreased consumption and investment spending -- in short, an
important drop in domestic aggregate demand, when the United States, Japan's
principle export market, is entering into mild recession.
By the way does anyone know what the average deposit rates are in private sector
savings? If they are higher, than the national postal savings rates, this too
would explain the reluctance of Japanese consumers to pull their funds.
Ironically, the only bright side to the current Japanese economy, is that
Japanese exports have risen steadily since the bubble broke and this despite a
30% increase in the value of the yen relative to the dollar.
Approved by ssjmod at 12:00 AM