Regular readers know that under the Japanese Model bank book capital levels and banker bonuses are protected at all costs. This includes socializing the losses and shifting the burden of the excess debt in the financial system onto the real economy. The result is a permanent
Regular readers know that under the Japanese Model bank book capital levels and banker bonuses are protected at all costs. This includes socializing the losses and shifting the burden of the excess debt in the financial system onto the real economy. The result is a permanent Japan-style slump or as your humble blogger predicted at the beginning of the financial crisis a downward economic spiral.
Under the Swedish Model, banks are required to recognize upfront the losses on the excess debt. This saves the real economy and avoids any socialization of the losses. The result is rapid recovery for everything except banker bonuses.
In 2008, Barack Obama told the US people the nation’s economic crisis would take a long time to overcome. In 2012, many of those voters are losing patience, because they have not been told why this recession has lasted so long or why his polices were the correct response.
Here is the missing explanation – based on not only the US experience, but also that of Japan and Europe.As Mr. Koo will show, in fact, choosing the Japanese Model is the wrong policy response to a bank solvency led financial crisis.
In 2008, Iceland also faced a bank solvency led financial crisis. Iceland chose the Swedish Model. Four years later, Iceland has put its financial crisis in the rearview mirror.
Meanwhile, where the Japanese Model was implemented, the US, Japan and Europe, the financial crisis continues.
Today, the US private sector is saving a staggering 8 per cent of gross domestic product – at zero interest rates, when households and businesses would ordinarily be borrowing and spending money. But the US is not alone: in Ireland and Jap