Prepare for a Japanese-style lost decade

The Puppet Master

You are correct, but the problem is that next year the next phase of the credit crisis is about to begin. Thus German banks are expected to lose another 90 billion or so, I'm not sure if that's dollars or Euros, the figure is so large it probably doesn't matter.
So global credit conditions are likely to be quite different to those during the Scandanavian banking crisis. I don't see who would come along to chuck money into the British banking system, house prices still need to fall over 50% to get them back to their long term average, just imagine the losses if they do.

Simon Stephenson

Liam Halligan has been making this argument in the Telegraph for well over a year, and I think it is a sound one, as long as it can be shown that the undisclosed bank losses are real, and are not just the result of provisions that will reverse when property values return to an equilibrium level. Just as above-trend property values have led to overstatement of profit, so below-trend values will lead to an overstatement of losses.

I fail to see, however, how you can have enough information to be able to assert:-

When Japan’s bubble burst, the Scandinavian countries were in just as much trouble. Sweden and Finland had allowed their banks to pump up a property bubble, and when the bust came the bank losses were as great as in Japan and the UK today.[my emphasis]

Surely the very point you make earlier - that an objective forensic audit is needed to establish the level of the bank losses - makes it speculative, to say the least, to assert that they are at a level comparable with the Scandinavian countries in the early 1990s. Doesn't it?

Bob T

Yes but shouldn't Cameron and Osborne being saying something of the kind, indeed already have said something? It is by no means impossible that the election will coincide with "the end of the recession" ie economic indicators turn for a while positive before plunging negative. Having effectively failed to make a strong plain language case against Brown's borrowing spree then who will the public believe come the election? Brown will speak of Britain having "turned the corner". All Cameron can do then is be a merchant of Doom and giving the appearance of sour grapes at the economic "good news". I'm not a Cameron supporter, I just like him to defend his corner more competently. What IS his game plan?

Herbert Thornton

Yes, Japan had a very hard time of it.

But imagine how much worse it would have been if Japan's population had not been virtually entirely Japanese - and, more important, patriotic, peacefully inclined Japanese at that, not receptive to incitement from extremist Muslim clerics.

Snowman

Fraser, sorry young man, what’s this ranting all about? To frighten Labour's Darling voters, or what?

Who covered the bad debt of the squeakily clean Scandinavian banks then? Did the money fall from the skies? Who charges the 2% for a mortgage on the Continent and not here? If you have a base rate tracker you be charged around that level, too. Should you have bought into Barclays when it dipped well below £1 you would have more than quadrupled your money. And faster than in Scandinavia. And your shouting that the banks ought to disclose ‘all bad debt’ just misses the complexity of the problem that effects not only our banks.

Listen, at the peak of the insanity a bank advanced a loan of £100k on a piece of real estate. It’s valued today at £50k, but the servicing of the original loan keeps going. Is this bad debt? This applies to other assets, too. Unless the servicing of these assets collapses, the banks can function OK.

This doesn’t excuse the banks for fleecing us on other lines of business, why, I could only guess. Neither does it say that there may be nasty surprises ahead. A lot of credit default swap paper’s still around, some synthetic trash, and assets for which the market dried out, or is so illiquid that their disposal would impair confidence. None of presents much of a risk if the financial environment stays benign. If it doesn’t, it’s another story.

On Japan: If one travels to the country one doesn’t get the impression that the citizenry has been suffering that much. One can only wish we could suffer in the years ahead as much as have the Japanese in the past ‘lost decade’.

The Japanese real estate bubble was by far nastier than ours. At its highest, the rent for a piece of land occupied by a waste paper basket could easily buy a house in California, and mortgage contract extended for up to three future generations. The collapse was truly phenomenal, yet the country didn’t go belly up. We won’t either.

maximusmanc

I think the argument of Japanese style lost decade has "been and gone" already. The point is we are coming out of recession, the UK consumer en-masse is not Japanese (culturally speaking) and much more prone to risk, and finally we are not nor will be (from current evidence) in a situation of long term deflation. Simple really ....