Do the Answers to Our Current Financial Woes Lie in the Past?
Bad debt. Frozen credit. Stock market panic. Popular outrage. Political paralysis. The financial crisis that has dominated September's headlines may feel unprecedented to many Americans. But it feels altogether familiar to scholars who have examined the economies of at least 15 other nations around the world that have undergone banking crises in the past three decades. What can the United States learn from the past tribulations of markets as diverse as Japan, Mexico and Turkey?
A day after the Dow Jones Industrial Average plunged a record 777 points, the subject drew a group of Wharton and University of Pennsylvania professors to a panel discussion at the school's Lauder Institute of Management & International Studies.
University of Pennsylvania political science professor Jennifer Amyx, a Japan expert who has written a book about the protracted financial crisis that began in that country in the early 1990s, argued that "financial crises are ultimately political" and recovery requires reforms in the way government oversees finance. The "lost decade" that followed the 1990 collapse of Japan's asset bubble -- stock prices didn't actually bottom out until 2003 -- was abetted, she said, by a governance system consistently unable to respond to the series of shocks that accompanied the end of the country's vast expansion of the 1980s.
"The country was in crisis on a number of different dimensions following the bursting of that bubble," Amyx said. Asset prices fell. Stocks followed. And banks, accustomed to a cocoon of government protections that had prevented even a single bank failure in the postwar era, trembled. But well after the first big bank failure, in 1995, the government mustered little effective response. An early dose of taxpayer money did little good. "Over the next few years, what you would see would be ad hoc measures by the government and the Ministry of Finance to try to deal with emerging, growing and increasingly severe problems in the financial sector." By 1997, as the dominant Liberal Democratic Party lost control of the upper house of parliament, still bigger banks were teetering on the verge of failure.
Those failures ultimately prompted major changes in the way banking was run. "Ultimately ... a new enacting coalition would emerge, a bipartisan group of legislators, but a different group," Amyx said. "Solutions to financial crises have to get at the heart of confidence, market confidence, and it really required, in Japan, a new set of actors to emerge who had a new set of ideas."
In the case of the United States, she noted, "the bipartisan wrangling over a legislative response has also involved a kind of closed group of actors that are seen as part of the problem [and] that have not brought forth really new ideas. They are proposing to throw a lot of money at the situation without changing the rules of the game first." In Japan, she said, "the rules of the game were fundamentally changed in terms of regulator-financial institution relationships" before public funds were injected to recapitalize the banks. "It was only with [the rule changes] as a prerequisite that injecting funds into the financial system produced new confidence in the market."