08/08/2012

By Michael Baxter, economics writer

The films, TV series and video games are all the rage. But zombies are rife in economics too, and they are rife, because procrastination is always better than action.

And if we are going to see a fix to the long—running problems in the economy today, we need to get the bad news out of the way; we need to let debtors default; have savers pay the price for excessive caution, and slay the zombies.

But it is so much easier to pinpoint the problems when it pertains to someone else.

Take Japan. Back during the days when the West was booming and Japan was haemorrhaging, it was on the receiving end of a visit from a very important person: Alan Greenspan no less, Chairman of the US Fed, perhaps the greatest central banker of all time, or so the wisdom of the age had it. Greenspan told the story in his book ‘Age of Turbulence’. He met Japan’s economic minister, Kiichi Miyazawa. “After our customary exchange of pleasantries,” he said, “I launched into a detailed analysis of the deteriorating Japanese banking system.” And he went to talk about how the US did things when it faced a crisis with its savings and loans companies. “I suggested,” said the man who was known as the maestro, “that the US government strategy of bankrupting a large part of our failed thrift industry, placing its assets in a liquidation vehicle, and unloading the assets at large discounts in a manner that would release the real estate market to fit the Japanese situation rather closely.”

“After listening patiently to my lecture, Miyazawa smiled gently as he said, ‘Alan, you have analysed our banking problems quite perceptively. As to your solution, that is not the Japanese way.’ Throwing delinquent debtors into bankruptcy and liquidating their bank collateral was to be avoided, as was firing people. The Japanese hewed to a code of civility that made inducing a loss of face virtually unthinkable.”

And so there you have it. What Japan absolutely did not want to do was declare the full horror of its economy, to let bad businesses fail. Instead, it chose to allow insolvent businesses with flawed models to carry on trading, even while the flesh of their business models rotted away.

It was so easy for Westerners, smug in their economic success, to lecture.

But it is a different story when the West is up against it.
Take these words uttered by Dr Angus Armstrong at the National Institute of Economic and Social Research. He said: "According to the FSA between 5 and 8 per cent of mortgages could be subject to forbearance. This has a familiar ring of the zombie firms in Japan which were insolvent but the banks would not close to avoid crystallising a loss."

But across Europe, zombies are more prevalent.

We are told that all the more troubled countries — such as Spain and Portugal — need is cheaper borrowing costs. Is that really all they need?

Right now, unemployment in Spain is nigh on a quarter of the workforce. During the good old days of boom, too many of Spain’s workers became specialised in construction. So that’s not just those employed directly in the building process, but real estate layers, marketing professionals, even media.

What Spain did not have was too much public sector debt. Indeed before 2008, Spain was held up as an example of a country that was effective at running its public finances. So if Spain’s problems are not caused by public borrowing, how can the solution lie with austerity?

The real problem with Spain is that too much credit flooded into the country and pushed up asset prices during the boom. And market economics say bad investment decisions need to be punished with losses, maybe bankruptcy. Instead Spain gets bailed out; its banks are given access to euro funding, superficially because Spain needs it, but in reality because those foolish enough to invest money in Spain’s real estate during the boom need it.

What Spain needs is a cheaper currency and to default; it needs some of what Iceland had. And with a clean sheet, Spain then needs investment — nothing short of a modern day Marshall Plan.


Michael Baxter, mike@iabn.co.uk

Editor the investment and Business news newsletter, www.investmentandbusinessnews.co.uk , blog.share.com and author of the Blindfolded Masochist