Déjà Vu All Over Again

The US is walking down the same path as Japan did in the 1990s with its banking crisis. This led to the "lost decade", the ten-year recession in Japan. Here is an article in The Economist that lays it all out:

EARLY in his tenure, Tim Geithner, the treasury secretary, promised that American policymakers would not make the same mistakes Japan did in tackling its financial crisis. But as politics threaten to upend his efforts, Mr Geithner should take a second to consider why Japan made its mistakes.

Japanese officials took too long to commit substantial public money to recapitalising their banks. But it was not because they were ignorant of the dangers or Andrew Mellon acolytes hell-bent on liquidating speculators. Like Mr Geithner, they feared being shot down by voters and politicians furious that taxpayers might bail out overpaid bankers.

One Japanese official told me that when he sees Treasury officials testifying before congress with protesters waving anti-banker placards behind them, it reminds him of pictures in Tokyo newspapers in the 1990s. At the time, he and his colleagues knew that saving the financial system would require a lot of public money, but also felt it would be politically impossible to propose it until all other avenues had been tried.

This sentiment is eerily similar to what prevailed inside the Treasury in mid-2008. Shortly after the near collapse of Bear Stearns in March, officials came up with options to pump public money into the financial system. "But these actions all required Congressional action and there was no prospect of getting approval for any of this," Phillip Swagel, an official with Treasury at the time, writes in a new account. "Such a massive intervention in financial markets could only be proposed if…Congress [was told] the financial system and economy were on the verge of collapse. By then it could well be too late."

Not until the Lehman bankruptcy and AIG near failure was Congress asked to pony up. Encouragingly, it did, passing the deeply unpopular TARP programme. It looked like we were going to avoid the Japanese fate after all. Now I’m not so sure.

Since then, we’ve begun to move backwards. Soaring unemployment coupled with a stream of revelations of banker excess, capped by the fury over AIG bonuses, has resulted in new restrictions being imposed on TARP recipients and made it impossible for the administration to use the additional $750 billion in TARP money any time soon.

Then there was the curious spectacle of Mr Geithner on ABC’s "This Week" on Sunday asserting that he still has "substantial resources" to support the banking system in part because some TARP "money is likely to come back from banks that are strong enough not to need this capital."

Let’s be clear. The fact that many banks, such as Goldman Sachs and Bank of America, plan to repay their TARP money as soon as possible is bad news, not good news. I’m sure Mr Geithner knows that, but can’t say it. They are repaying the money not because they have ample capital but because they are repelled by the prospect of political interference if they accept any aid.

What a tragedy. The US seems to create it own misery. Looking back, the US had good leadership under Clinton but he couldn't keep his zipper shut so his politics was blunted by rabid Republicans. Then eight disasterous years under Bush with unnecessary wars and tax giveaways to the rich that bankrupted the country. And now Obama, who has so much promise, is allowing Geithner to go down a path that is known to be disasterous. What a shame!