IMMORAL U.S. BAILOUT ECHOES JAPAN’S 1990s ‘CRISIS MANAGEMENT’ FLAWS

Bro. Erle Frayne Argonza

Magandang hapon! Good afternoon!

It’s been some couples of weeks now since the financial downspin in the USA took a further plunge as mega-banks sought help from federal government for rescue. The closure of the Lehman Brothers and the S.O.S. by other big banks that are now in the red rocked the global stock markets to a new round of instabilities and volatilities, even as the US economy is in danger of another Great Depression.

As I’ve already expressed in many articles of mine, the US financial collapse, an event that economists in many parts of the world forecast as early as the 1990s yet, is bound to happen, on account of many factors. The key factor, as this analyst and fellow ‘nationalist economists’ have been saying since 1998 yet (when I was actively involved with a group of economists in Manila called the Independent Review circle), is the widening gap between the (a) ‘virtual economy’ based on predatory finance that produces mere fictitious values and the (b) ‘real economy’ or ‘physical economy’ that produces real values.

The serial liberal economic reforms that began in 1971 yet, which saw the collapse of the gold standard and the dropping of fixed exchange rate (FER) in favor of ‘floating rate’, and onwards through the liberalization-privatization-deregulation-decentralization (structural adjustment policies or SAPs) of the 1980s, and onwards to the GATT-Uruguay Rounds that created the WTO in 1994, took its catastrophic toll on the economies of the planet, but most specially the USA’s.

The Nixon-era financial-monetary reforms and the Reaganomics (SAPs) were the policy culprits of America. They dealt the final death blows on the dirigist policies of New Deal, initiated by Franklin Roosevelt but which was inspired by dirigist policies of earlier luminaries (i.e. Alexander Hamilton, Abraham Lincoln, Friedrich von List), provided the impetus that created the strong, gigantic ‘physical economy’ of the country, and transformed it into a world power economically, politically and culturally. Without dirigist economics (interventionist) and the New Deal, Middle Class America wouldn’t have been possible. The neo-liberal reforms simply wiped out whatever was left of the New Deal by the 1980s, and with the liberalization of the financial –capital-monetary markets, the predatory financiers had their field day of looting the middle class purses under the rubric of portfolio capital and derivatives operations.

Had the US policy makers just labored a bit and assigned their staff to scour the world for some related experience of bank-financial collapse, their researchers could have easily ‘discovered’ the experiences of Japan in the 1990s. By the early 1980s, when Japan clearly demonstrated its sterling industrial and technological capabilities as the base for its wealth production, the Zaibatsus and the policy makers decided to go the liberalization way, confident as they were that the fruits of decades-old ‘physical economy’ build up can’t just be easily wiped out by predatory financier operators.

Japanese technocrats (both in Japan and overseas) also theorized that the key to producing a sound, healthy, mighty Japanese economy was in the realm of micro-economics more than public policy. Never mind if the policy environment will shift from the protectionist-dirigist policies of the post-war decades to liberal policies, provided that at the level of production and organization, capacity and internal potency can be demonstrated. The likes of William Ouichi’s ‘theory z’ comes to mind, or ideas that spawned strategies and tools dovetailing on quality control, team building, and decentralized operations. The world was so awe-inspired by the ‘Japan Incorporated’ model that was based precisely on the micro-economic route, and was extolling the Japanese corporate firm to the hilt as the new champion of the globalizing economy.

The USA that had demonstrated its strength on macro-economics—In the terrain of public policy—as the route to economic might, must have been seduced by the Japanese ideological onslaught at one point, that it so sonorously echoed the Japanese technocratic jargon of ‘globalization’. But when Japan’s financial system began to buckle down in 1994, which then impacted on the rest of the economic sectors, the US politicians and technocrats simply didn’t pay attention, fixated as they were to the seductive results of the ‘virtual economy’ (bubble operations) on the GDP of America.

To recall, Japan suffered miserably for the bailout mistake it pursued. Dabbed as ‘crisis management’, the state went on a binge of saving ailing banks and financial houses, the very same measures that the Bush-Paulson team is now embarking on. Alarmed at those events than in Japan, which led to a 10-year recession & almost zero growth, I began to raise howl about the ballooning portfolio investments in the Philippines by 94-95, and was among those experts who forewarned the state officials that Japan’s ‘crisis management’ was seriously flawed, was tantamount to giving incentives to looters instead of criminalizing, them, and should never be enforced in the Philippines or ASEAN in case that the portfolio bubble will burst in Manila and the region (the bubble burst in 1997).

To repeat: Japan suffered miserably from that fiasco. Recession howled like unstoppable forest fires for ten (10) years, and were it not for the high growth of East Asian markets, Japan couldn’t have risen back to appreciable growth by 2005. Interest rate was compelled to be brought down to zero percent, a precedent that many countries affected by financial meltdowns were aloof to emulating. Bankruptcies, corporate closures and downsizing led to dislocations and unemployment. For the first time in many decades, former decent Japanese executives and employees who lose their jobs and had their remaining mortgaged properties confiscated, were rendered homeless and starving, and forced to reside in the streets as paupers and vagabonds.

Sitting with my fellows in the Independent Review circle from 1997-onwards, we took turns in exposing the maladies of the neo-liberal reforms, spoke in diverse media (TV, radio) to forewarn the public of the imminent financial collapse in East Asia (the meltdown took place beginning in June of ’97), and by 98 were of the consensus that the USA was next in line for a meltdown of even catastrophic proportions than either Japan’s or South East Asia’s (97 meltdown). The very destructive effects of predatory finance saw the decline of industry (de-industrialization), agriculture (land use conversions, decay), infrastructures (some huge infra were even privatized), S & T (low priority in budgets & education), and transport & communications in the USA. If the neglect of the ‘physical economy’ will continue for another ten (10) years, it will be too late for salving the US economy as a whole. Any catastrophic bubble burst and financial-monetary meltdown could bring the economic house down, collapse consumption, and render the US economy much like unto a Latin American economy past 2010.

As I recall then, we experts from the Independent Review circle strongly opined that the ‘crisis management’ tactic was immoral and extremely perverted. How in the world could the state ever reward criminals at all? The bankers and financiers looted the Japanese purse by probably worth trillions of dollars, they should have been criminalized for their sordid crimes, and yet they were even rewarded! Unbelievable! This is one excellent narrative for the Ripley’s Believe It Or Not!

Fortunately for the Philippines, there was no large-scale bailout of any bank as a result of the 1997 Asian meltdown. Those realty and construction companies affected by the crisis, affected precisely because they over-exposed themselves to ‘hot money’ foreign portfolios that simply dried up as the same portfolios were pulled during the first month of the meltdown, were immediately able to cope up by retooling and re-engineering their strategies and tools. Interest rates were lowered, excess liquidities were flashed out in well managed manner that deserve our central bank accolades from the Bank of International Settlements. In less than a year after the meltdown began, we were back to consumption patterns like there was no recession at all. We didn’t take the Japan route, luckily. By 2001 and onwards our growth patterns were back to appreciable growth, and the local bourse moved up as well.

Today, all over the ASEAN + China-India-Korea (minus Japan), the Asian meltdown seems like an ancient event down memory lane as things have been moving fast. We just can’t believe that our mighty economic partner, the USA, didn’t learn its lessons from the 2001 recession there and from the flaws of the Japanese bailout. ‘Bailing out the rich’ isn’t the issue here, but rather ‘bailing out the criminals’ which is a gross disincentive for the legitimate SMEs and other market players that didn’t receive the same favor.

If we were to seriously search for appropriate short-term tactic for salving ailing financial institutions, the answer lies in a proven approach to corporate ailments: bankruptcy reorganization. The economists Robert Reich (former US secretary of Labor) and Lyndon LaRouche (Executive Intelligence Review) have been airing this solution very strongly, and I am myself bent on accepting this micro-economic short-term solution as an exemplar for the rest of the world. I would not be surprised if the eminent economists Joseph Stiglitz and Paul Krugman would air a similar advisory, and they should better air their counsel strongly.

The entire planet today is watching the horrific bailout in the USA, almost forgetting that this copycat bailout already flattened Japan for a decade at least before. Each one of us should look at our own backyards and make sure that our respective states won’t emulate the rather devious and insane bailout of Japan Incorporated and the Bush-Paulson team.

[Writ 04 October 2008, Quezon City, MetroManila.]