In my last blog two-weeks (sorry, I was in Japan till yesterday) ago, I wrote of the so-called “Free Market Solution” to the financial crisis, and the fear that many have expressed about the end of capitalism. Just so people don’t think that I love regulation, let me share with you a meeting I had in the late 1990s with a group of Japanese businessmen along with a member of the Japanese government, someone who was with the powerful MITI (Ministry of International Trade and Industry).
Many of you may remember the days when Japanese companies ventured overseas and bought everything they could get their hands on—Pebble Beach, La Costa, Rockefeller Center, etc. At one point, they owned well over half the Class A commercial buildings in downtown Los Angeles. Fueled by the real estate bubble back home, easy money, and interest rates at 1-2%, they found that a square meter of land in Tokyo was worth the same as acres of property in America. The citizens of Japan were the biggest savers in the world, and since they couldn’t afford to buy any of their own real estate, individuals also joined the game, and purchased second homes and raw land in Hawaii, Australia, Spain, and Southeast Asia.
Then everything went wrong, and Japan faced the start of what many would call the lost decade (or perhaps even a generation). The period from the early nineties through the early part of this decade was characterized by negative growth, deflation, significant changes in the economic foundation of a nation once proud of its economic accomplishments. Some of the largest banks—The Dai-Ichi Kangyo Bank, Fuji Bank, Long Term Credit Bank of Japan, Industrial Bank of Japan, Sumitomo Bank, Sanwa Bank, Mitsui Bank—disappeared or were merged to create just a few megabanks.
It was in this environment that we had a meeting in Los Angeles to discuss the financial crisis in Japan. Unlike in the US, regulations in Japan were stringent (perhaps in the wrong places). Many bankers would jokingly tell me that they not only needed the permission of the Ministry of Finance to change the color of the signs on their billboards, but that they needed to get the Ministry’s permission even to leave the room for a bathroom break. There was a reason banks didn’t give away toasters in Japan. They could never get the authority, and even if they did, the Ministry would probably tell them exactly what model was permitted, and how many they could give out.
The moderator showed a television program produced by NHK, the Japanese version of PBS which is both governmentally funded AND goes around collecting monies from homeowners as a form of a TV-tax. The program discussed of the need for the government to reign in the banks and to provide a soft-landing to protect the consumers of Japan. The gentleman from MITI spoke of the challenges that the government faced, both in terms of selling the new policies to the people, and in the difficulty of regulating banks. Being a graduate of the free market capital of the world, the University of Chicago’s Graduate School of Business, I asked the forbidden question, “Why is it that the government has to pretend that it is the only one that can solve the problem that it created to begin with, without trusting the market mechanism to solve it? Do you think that the citizens of your nation are incapable of taking care of themselves?”
The room fell into silence. The jovial friendly atmosphere was replaced with a sudden chill. The gentleman from MITI, didn’t even look at me when he answered, “I physically resent the types of comments that I just heard.” I guess I won’t win any awards from the government of Japan.
He was obviously a believer of the benevolent role of the government. His job depended on it.
In 2008, as the US swims through the financial mess, Mr. Aso, the new prime minister of Japan is offering to throw a life line to the US. But at the end of that life line is an anchor that will surely sink anyone who hangs onto it. Anybody who believes that the Japanese banks are much healthier than those in the rest of the world, I have some real estate in Alaska next to the Bridge to Nowhere that I can sell you. The only reason they are better off these days is because of the incredible rate of savings amongst the people in Japan, happy with their the 0.3% interest on their pass-book accounts.
It is Halloween in the US, a special night in which we are allowed to believe in ghosts. So while we out there trick or treating with our kids, perhaps we can also believe that the Japanese banks learned their lessons from the 80’s and that they can teach us something about the value of over regulation and how to submerge an economy into a decade plus recession.
Although I have no idea what we should do, at least I know what we shouldn’t do.
Joseph Lee is an Adjunct Professor at the Peter F. Drucker and Masatoshi Ito Graduate School of Management and also at Pepperdine's Graziadio School of Business and Management.