Global Finance: The Wild West All Over Again

Since I last addressed you in this esteemed magazine, I have had a close-up, personal look at Asia, particularly Japan and China, and I’m back to report that most of that region is not a pretty sight. Their financial and economic systems are about in the same shape as the United States was during the Great Depression.

Japan’s problems center around a banking system that has about a trillion dollars in nonperforming loansu00e2u20ac”mostly in southeastern Asian and local real estate. In addition, their politicians have been using the people’s postal savings funds to try to support their stock market with resulting losses, unpublished but estimated, at many billions of dollars. Finally, the Nikkei stock market has fallen below 14,000 yen. At that level, many banks’ and insurance companies’ capital is seriously eroded, since much of it is held in common stocks. Not a good picture and a situation that can’t be cured quickly even if they take all the good advice I gave them: Act boldly and form an RTC, create bridge banks, set up a single cleanup agency, and close insolvent banks for starters.

As for the rest of Asia, those countries make Japan look good by comparison. All Asian financial systems are in collapse.

It is easy to see that the world learned little from our S&L and banking difficulties of the 1980s. Many of the problems we experienced are present in Asia in a bigger way. Could all of this have been predicted? Everyone knows that 20/20 hindsight is always available.

But if you look closer, there are common threads in these financial system disasters, so I’ve put together the list of Seidman’s Seven Deadly Sins to predict this kind of problem. Here they are:

One, lack of an independent supervisory system (e.g., the U.S. savings and loan industry, Japan, South Korea, and most of the other countries)

Two, conflict of interest between lenders and borrowers (e.g., construction company owners of U.S. savings and loans, Indonesia, Korea, Japan, and others.)

Three, governmental influence in directing lending (e.g., China, Russia, Japan, and Asia)

Four, lack of transparency in reporting financial institution results as required by the SEC here in the United States (e.g., Japan and most developing countries)

Five, lack of capital sufficient to meet institutional standards (e.g., Korea, Japan, and most of Asia)

Six, borrowing short and lending long (e.g., U.S. savings and loans and Koreau00e2u20ac”90% of their debt is due within one year)

Seven, concentrations in lendingu00e2u20ac”overenthusiam for one type of loan, usually commercial real estate (e.g., U.S. banks in the 1980s, Japan, Sweden, and others)

As a result of financial sinning, much of Asia is in trouble. But like most sinners, they blame someone else; in this case, the United States, for bringing them the much-touted global free market. That free market is now disciplining those sinners in a brutal way.

The fact is, the current global free market is like the old wild west of the 1800s in the United States, as there is no SEC, FDIC, FTC, Federal Reserve, or other watchdog agency to help prevent the boom and bust of the unregulated market processes. With the much-talked-about failure of the Long-Term Capital Management hedge fund, the global marketplace has also claimed a primarily U.S.-based company

In contrast, China, with minimal participation in the global financial market (it controls no convertible currency), looks like an island of stability to most observers.

There will soon be much debate, congressional hearings, and professorial papers trying to figure out how to make a global financial market work without global regulation. Experience tells us that a free market does not work without a lot of government.