WASHINGTON POST: A tidal wave of public outrage over bonus payments swamped American International Group yesterday. Hired guards stood watch outside the suburban Connecticut offices of AIG Financial Products, the division whose exotic derivatives brought the insurance giant to the brink of collapse last year. Inside, death threats and angry letters flooded e-mail inboxes. Irate callers lit up the phone lines. Senior managers submitted their resignations. Some employees didn’t show up at all. MORE
TIME: The rescue of AIG is warping the banking system and unnecessarily extending the credit crisis. This misguided effort stems from a lack of transparency and some basic misconceptions about AIG’s business. […]But there’s a true insight into this mess if you just step back and consider the bigger picture, not just AIG. Regardless of the details of the various swap contracts, they all represent potential transfers of wealth between financial institutions. If we consolidated the entire financial sector, all these debts would effectively vanish. […] At the very least, there should be full transparency. Any institution receiving money from the government — and ultimately from American taxpayers — should reveal its holdings. Even institutions that do not require a bailout should be more closely tracked by regulators. The government can and should monitor all transactions, even those over-the-counter. We have focused too much on each individual bank and its possibility for failure. The economy does not need every bank to survive; it needs most. Right now, we need to know which ones. By propping up financial institutions that are subject to unknown potential losses, the government is prolonging the uncertainty about whether they will fail. This perpetuates the crisis of confidence in which banks do not trust one another enough to loan money. MORE
NEW YORKER: Another option—which recently received the reluctant endorsements of even Alan Greenspan, James Baker, and Lindsey Graham—is temporary nationalization: the government takes over the most troubled banks, splits off their toxic assets, puts those assets in a publicly owned “bad bank,” and sells off the healthy parts of the businesses. After a ruinous boom-bust cycle in the late nineteen-eighties, some Scandinavian governments followed this approach. Within a couple of years, their economies were recovering strongly, and the Swedish government ended up making a profit. Here the strategy could punish irresponsible bankers (whose shares and options would be wiped out), avoid having to put a price on the toxic stuff, and enable the government to order the institutions under their control to make more loans.
Right now, for instance, the government could take temporary control of Citi and Bank of America, and, if necessary, give larger handouts to those banks that are deemed capable of surviving. A President with Obama’s communication skills and approval ratings should be able to market such steps to the public, especially if he were also to set up a 9/11-style commission to investigate what went wrong on Wall Street (an idea that shouldn’t be ruled out just because John McCain supported it) and to demand repayment of some of the bonuses given out to executives at firms like Citi and A.I.G.
Last week, Christina Romer, the head of the Council of Economic Advisers, expressed the hope that the Administration’s policies would lead to a “Rooseveltian moment,” by which she meant a sharp economic upturn, like the one that occurred from 1933 to 1937. Acting in a Rooseveltian manner involves defying orthodoxy, challenging powerful interests, and giving voice to the public’s disgust at the corrupt financial establishment. F.D.R. was called a lot worse names than socialist. He didn’t let it stop him. MORE
WIKIPEDIA: The Lost Decade (????10?, ushinawareta j?nen) is the time after the Japanese asset price bubble’s collapse (??, h?kai), which occurred gradually rather than catastrophically. The economic miracle of the 1980s ended abruptly at the very start of the 1990s. In the late 1980s, abnormalities within the Japanese economic system had fuelled a massive wave of speculation by Japanese companies, banks and securities companies. Briefly, a combination of incredibly high land values and incredibly low interest rates led to a position in which credit was both easily available and extremely cheap. This led to massive borrowing, the proceeds of which were invested mostly in domestic and foreign stocks and securities.
Recognizing that this bubble was unsustainable (resting, as it did, on unrealizable land values – the loans were ultimately secured on land holdings), the Finance Ministry sharply raised interest rates. This popped the bubble in spectacular fashion, leading to a massive crash in the stock market. It also led to a debt crisis; a large proportion of the huge debts that had been run up turned bad, which in turn led to a crisis in the banking sector, with many banks having to be bailed out by the government. Eventually, many became unsustainable, and a wave of consolidation took place (there are now only four national banks in Japan). Critically for the long-term economic situation, it meant many Japanese firms were lumbered with massive debts, affecting their ability for capital investment. It also meant credit became very difficult to obtain, due to the beleaguered situation of the banks; even now the official interest rate is at 0% and has been for several years, and despite this credit is still difficult to obtain.
Overall, this has led to the phenomenon known as the “lost decade”; economic expansion came to a total halt in Japan during the 1990s. The impact on everyday life was muted, however. Unemployment ran reasonably high, but not at crisis levels (the official figure is a little under 5%, but this is a considerable underestimate – the real level is probably around twice that). This has combined with the traditional Japanese emphasis on frugality and saving (saving money is a cultural habit in Japan) to produce a quite limited impact on the average Japanese family, which continues much as it did in the period of the miracle. MORE
BUSINESSWEEK: The chief lesson from Japan, scholars say, is that good monetary and fiscal policies are necessary but not sufficient for a recovery. The government also needs to spend political capital by taking on entrenched interests: the management, shareholders, and debtholders of big but unhealthy banks that need to be shut down so the financial system can get a fresh start. That campaign must start with a cold-eyed audit of the books of every major institution. MORE