Turning Japanese
Fraser Nelson 9:49pm
Is the British economy turning Japanese? Since asking the question last year on Coffee House, the evidence has been piling up – and it makes for a cover story in this week's magazine (which I have written with Mark Bathgate). The similarities are as follows:
So far, so British. This week’s stunning disclosure by Mervyn King that HBOS and Lloyds had borrowed £62 billion without telling anyone shows that British banks are still living in a secrets-and-lies situation. No wonder they can’t raise capital: people don’t want to sink their cash into a vortex. This is holding back the British recovery in three ways.1. Japan’s bust followed years of debt-fuelled growth which vain politicians saw as prosperity.
2. When the bust came, Japan’s government kept on spending. They did so in the name of Keynsian stimulus, thinking this would in itself kick start a recovery. All it achieved was to sink Japan deeper into debt.
3. Crucially, Japan didn’t do full disclosure on the collapsed banks. To fix the banks was, they figured, painful root canal surgery that this recession-struck country could do without.
4. They became “zombie” banks – i.e. they’d be dead if it wasn’t for taxpayer support.
5. Problem is, this is self-perpetuating. The longer they refuse to disclose their real losses, the harder they find it to raise capital. So to cover their losses, they have to keep making calls on the taxpayer – bailout after bailout.
Not all crises are the same (see this excellent note by Carmen Reinhart). Japan tried the Keynsian stuff. It resulted in false dawns and more debt (now about 200 percent of GDP). Britain can avoid this, however. Whatthe next government can do is to end this secrecy, which is what the Scandinavians did. They sufferered their bank blow-up about the same time as the Japanese (overview here), but instead of hiding the loans they did what our government should do: brought in credible outside experts to audit all of the banks and give a full damage report. The Scandianavians realised early on that Brown-style concealment, this “oh, here’s a £62bn loan to the banks we didn’t tell you about last year” - is absolutely toxic. Not just for investment, but for the economy. In their lets-all-get-naked-in-a-sauna way, the Scandinavians revealed everything. Banks were forced to raise capital, but when investors felt they knew everything the money eventually came.1. The mistrust dissuades people from investing in the banks. Banks don’t lend to each other – each suspecting the other of hiding toxic debt. Just like in the run-up to the American Great Depression, the banks start overcharging their current customers (i.e. mortgage-owners) to cover the losses of bad clients who wont repay loans.
2. This costs Britain billions. Our base rate is 0.5 percent and average mortgage rate is 4.3 percent. This gulf – worth about £50bn a year to the British economy – is the price we pay for a broken bank system. No wonder Europe has pulled into recovery: its base rate cuts actually work. That is to say, people’s mortgages are appreciably lower. Most on the continent pay under 2 percent interest (thereby releasing cash to pump into the economy and get the recovery started)
3. Small companies are not getting the credit they need – and business investment falls. It’s okay for listed companies, who can do rights issues etc. But not for banks. This is why MPC member Adam Posen said in his recent speech that Britain is suffering worrying similarities to Japan.
Doing this to Britain would reveal a very ugly picture – the IMF suggests around $600bn (i.e. about £360bn) of writedowns. But without it, banks won't get work. Sure, we’ll have a few functioning ones – like HSBC. But when the world economy comes (as it did in the mid 90s for Japan), Britan will not be able to catch the wave because our banking system will still be broken. Posen put it well in that speech to the Cass Business School:
“The UK has an uncomfortable parallel with the Japanese financial system when the Japanese economy began to recover in the mid-1990s and was unable to sustain it .... The closer one looks, the more worrisome this specific parallel becomes, given the concentration of the UK banking system in a few major, mostly still troubled, banks.”
Potential PM Cameron will only have one shot at fixing the banks: investors will want to see what type of a guy he is. That’s why Britain is at a crossroads – Japan on the left, and the Scandinavian example on the right. Right now, Britain is indeed in danger of turning Japanese. But if the Tories are smart, and bold, they can turn it back.
P.S. We toyed with putting this Darling illustration on the cover, but the idea of a sumo Chancellor squatting on our readers’ coffee tables did not appeal. The original attempt, by the wonderful Carla Millar, was to put a Union Jack on the
cartoon used in the original cover to the 1980 Vapors single cover. It’s to the right – and fab. But we figured that there are only a handful of people sad enough to have recognised the reference.
P.P.S. Tom Pride makes an excellent point below: reading and listening to Liam Halligan has done much to persuade me of the need to fix the banks. We did a post-Budget panel together in April where he urged Cameron to show leadership on this. He’s been pretty much on his own, but events are proving him right.
P.P.P.S. An economics editor of a national newspaper emails to say he’s been banned from saying “Turning Japanese” because of these ridiculous lyrical conspiracy theories. I ask you. The song is about love. Missing your girlfriend. Not recognising yourself without her, because of the behavioral pattern changes. There are some twisted minds out there.
Previous
Steve Tierney
November 26th, 2009 10:33pm Report this commentYou didn't cover the whole problem - but your suggestions would certainly go some good way towards a resolution.
paul holdstock
November 26th, 2009 10:38pm Report this commentfraser, the problem is, that japan suffered a long period of economic stagnation despite having a strong manufacturing base. we have very little manufacturing to rely on, our stagnation will be MUCH longer, and MUCH worse.
what brown and co have done to the nations finances is tantamount to treason.
wheras leading us into an illegal war in iraq, clearly IS treasonable.
bring on the war crime/treason trials. there could be a good business to be had in the manufacture of tumbril's.
Jeremy
November 26th, 2009 11:14pm Report this comment"But we figured that there are only a handful of people sad enough to have recognised the reference."
Are you kidding?
Turning-Japanese-I-think-I'm-turning-Japanese-I-really-think-so...
It's a post-punk pop classic, and you could have acknowledged the source in the credit for the image. That's only fair practice, after all....
2trueblue
November 26th, 2009 11:17pm Report this commentWe are in real trouble and there is no transparency so who knows where we go. The illusion that we are the only ones in trouble is just as worrying.
The next 6mths will lead to the exposure of lots trouble in other countries, and right now assuming that we are alone is more dangerous than anything else.
The Scandinavian axperience can not be compared to ours, they are a much smaller economy and are not so globally exposed.
Nicholas
November 27th, 2009 12:44am Report this commentI thought Brown had banned the image of Britannia (even in Geisha garb) as unrepresentative of the progressive and multi-cultural Peoples Democratic Republic of New Labia?
Liu qiang
November 27th, 2009 5:48am Report this commenthhhhh
Lord Wallington
November 27th, 2009 6:31am Report this commentAs Turning Japanese by The Vapours is all about mastabation it would have summed up our current government correctly. !!
THX1138
November 27th, 2009 7:48am Report this commentI think Fraser has got an attack of The Vapors, C'mon it's a classic and they come from my home town Guildford - You should have hat-tipped them!
THX1138
November 27th, 2009 8:40am Report this commentFraser you were wrong on the stockmarket and wrong on the GBP why should anyone believe any of your predictions?
Gawain
November 27th, 2009 9:10am Report this commentOh dear, we're in real trouble then !
Cameron has many fine qualities but he is not bold and is uncomfortable declaring blunt truths. I am afraid that the whole shadow cabinet give the impression of a group of people who expected to inherit the cosy, cushy and corrupting Blairite polity and can't yet admit to themselves that the world has changed. Bring back John Redwood, he understands the problem.
David B
November 27th, 2009 10:10am Report this commentWe just have to hope that by the time of the next election it is not to late.
Our banks are in a bad way. This government, as it has done for 12 years, spends its time blaming others and coming up with populist policies (disclosing how many people are paid more than £1m) when they need to look at themselves, figure out how they contributed to the failure of the system and start to find ways to correct the problems. In addition they need to change the regulator frame work to let the bank lend to business and try and stop the next failure.
The chances of this government admitting it has a part to play in the failure are about as good as turkeys voting for Christmas!
Jeremy
November 27th, 2009 12:06pm Report this commentLord Wallington:
"As Turning Japanese by The Vapours is all about mastabation it would have summed up our current government correctly. !!"
Your Grace,
One doesn't mastAbate, one mastURbates.
I remain your obedient servant,
Master Bates
To Fraser:
I think you missed a trick there, Fraser. I mean, the illustration you've used for the cover is good, but I don't think it's quite as imaginative, as inventive or as eye-catching as the Vapors-inspired piece would have been.
Regards
Jeremy
Laban Tall
November 27th, 2009 2:48pm Report this commentWhat Paul said. Our financial institutions are in trouble - and that seems to be all we have.
Japan still makes things that people want to buy - and it still owns world brands.
Tom Pride
November 27th, 2009 4:17pm Report this commentTalking of hat tips, how about one in the direction of Liam Halligan who has been fighting a lonely battle on this front for the past year?
http://www.telegraph.co.uk/finance/comment/liamhalligan/
The killer for the restoration of growth is the banks refusing to lend to businesses, shrinking their loan books as they de-leverage and reduce risk. You and Halligan believe that they cannot break out of this cycle until they come clean about their financial positions and trust in their creditworthiness is restored.
Tim Congdon (not being one of the 364 economists to condemn Geoffrey Howe’s 1981 budget) points to the shrinking UK and US money supply despite the quantitative easing as a symptom of this process. He sees deflation (Liam Halligan disagrees) and I think rather than using quantitative easing to buy government debt, he advocates that the Government / Bank of England should place the created money on deposit with the banks, forcing them to lend into the economy, halting and reversing the de-leveraging process.
George Osborne should go and have a chat with Halligan and Congdon. Cleaning up the banks and getting them lending again is as much a priority as getting a grip of the government finances.
Back to top