Saturday, May 12, 2012

Telegraph's Liam Halligan frames policy choice as Japanese vs Swedish model

In his Sunday Telegraph column, Liam Halligan observes that it is the broken banking system that is keeping growth at bay.

He frames the policy choice for how to deal with the broken banking system and restore growth in terms that regular readers of this blog are very familiar with:  the Japanese model versus the Swedish model for handling a bank solvency led financial crisis.

There is no choice between growth and austerity. This posing of this false dichotomy reflects, instead, the ideological, almost tribal nature of the Western world's policy debate. The real choice is, in fact, between two forms of crisis management – that taken by Sweden on the one hand and Japan on the other. 
The reason the UK and much of the eurozone has slipped back into recession has nothing to do with a "lack of demand", as the Keynesian dinosaurs assert. A bit more government spending here, an "enterprise scheme" there, may buy off the odd interest group. But such measures are mere political parlour games, doing nothing to decide our economic trajectory and having zero impact on growth – unless, of course, the extra spending they entail tips international opinion over the edge and our bond markets totally seize, forcing us back into a deep, Lehman-style, slump. 
Western Europe is failing to grow quite simply because the banking system remains broken. 
This applies to the banking system in the US as well.
It remains broken because, as this column has repeatedly asserted, massive, unaudited liabilities continue to lurk within banks' off-balance sheet vehicles, ensuring that the inter-bank market remains paralysed by fear of counter-party risk. 
As such, lending languishes at rock-bottom, with credit-worthy firms and households starved of the working capital that is the very essence of economic progress. That's why we have no growth. 
During the early 1990s, faced with a similar situation, Swedish leaders had the foresight to force their busted banks to reveal their losses, using a combination of "full disclosure", write-downs and a "bad bank" to re-boot credit markets, which in turn got the economy moving. It was a text-book credit-lock escape, but no less courageous for that. 
Japan, of course, took a different route. Bogged down by institutional torpor, and a cultural "fear of failure", the Japanese dealt with their 1990s credit crunch by sticking their collective head in the sand – which is where it remains, almost 20 years on. 
The "zombie bank" – leeching from society, dragging down the rest of the economy – may have been invented in Tokyo, but it's now increasingly to be seen in Madrid and Paris, Frankfurt and London.
and Washington, DC.
So forget "growth V austerity". The question is, do we follow .... Sweden or Japan? That's the real policy dilemma we face.

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