Wednesday, March 7, 2012

Wall Street understands there is no end to intervention so long as Japanese model pursued

In a Telegraph article, Britain is praised by Deutsche Bank for how it has implemented the Japanese model for handling a financial crisis.

Under the Japanese model, governments protect meaningless bank book capital and transfer the losses on the excesses in the financial system to taxpayers and the real economy.

What caught my attention was that after praising the last five years of implementing the Japanese model, the analysts then observed that to continue successfully implementing the Japanese model will require several more years of intervention.

As Japan has shown and these analysts confirm, there is no end to the intervention required to implement the Japanese model.

As your humble blogger has pointed out, the only way to end the bank solvency led financial crisis is to abandon the Japanese model and adopt the Swedish model.  Five years is more than enough time to show that the Japanese model does not work.

Deutsche Bank analysts said that despite the country's vulnerability to the crisis because of its high debt level, "the UK authorities have done a good job to date" in limiting the effects, benefiting from control over its currency and its own central bank. 
As a result of independence the pound fell sharply, the Bank of England increased its balance sheet aggressively and consistently, giving investors a clear signal of intent, and the Government was early to respond with austerity. 
Since the beginning of the crisis the Bank has cut interest rates to an historic low of 0.5pc and voted for a £325bn injection of new money into Britain's ailing economy.... 
"The UK has also been earlier than most of its international peers in starting to address the significant budget deficits left by the financial crisis." 
As a result, the FTSE has been one of the best performing developed markets during the crisis, they noted. Other countries, including those at the periphery of the eurozone, have struggled to respond effectively to the crisis, they said. 
"So, likely the best sovereign policy post crisis is to devalue, slowly cut your budget deficit and allow your central bank to have licence to intervene at will. 
The Japanese model policies.
"Going forward we still think that we are set to need a few more years of heavy intervention to ensure that five years of relatively successful crisis management isn’t wasted. 
"This is by no means the end of this rolling crisis but it probably isn’t the end of intervention."

Japan is at 2+ decades and counting.  There is no reason to believe that the UK, US and EU will be any different.

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