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Elizabeth Warren: Finally someone with a clue how to handle the financial crisis

2009 April 5
by Ian Welsh

Warren’s the chief watchdog for the 700 billion TARP fund.  Unfortunately, she has no real power, but it’s still nice to see a government official say not just some of the right things, but almost all of the right things.  Talk of how the US is following Japan’s path is finally everywhere (myself and a few others have been talking about it for years, and started really beating the drums last year).  Here’s Elizabeth:

Warren, a Harvard law professor and chair of the congressional oversight committee monitoring the government’s Troubled Asset Relief Program (Tarp), is also set to call for shareholders in those institutions to be “wiped out”. “It is crucial for these things to happen,” she said. “Japan tried to avoid them and just offered subsidy with little or no consequences for management or equity investors, and this is why Japan suffered a lost decade.”…

… Warren also believes there are “dangers inherent” in the approach taken by treasury secretary Tim Geithner, who she says has offered “open-ended subsidies” to some of the world’s biggest financial institutions without adequately weighing potential pitfalls. “We want to ensure that the treasury gives the public an alternative approach,” she said, adding that she was worried that banks would not recover while they were being fed subsidies. “When are they going to say, enough?” she said.

She also calls for the resignation of the CEOs of the worst firms.

One thing I’m tired of hearing though is the phrase “lost decade”.  Japan didn’t just lose a decade, it has never really recovered.  The good times have never come back.

I also think that bondholders need to take a haircut as well, not just shareholders, though they may not need to be wiped out in all cases.  However, if the value of a company if it was liquidated is less than zero, then yes, non-secured bondholders (those whose bonds aren’t attached to specific assets with value) should be wiped out.

14 Responses
  1. thingsComeUndone permalink
    April 5, 2009

    Hi Ian I wonder about the cause of the lost decade sure there was a real estate boom I heard one joke that land prices were so high the real estate prices for the grounds of the Imperial Palace in Japan was worth more than the state of California.
    But I’m wondering if out sourcing jobs was the trigger? Bush 1 met with the Japanese prime minister and they agreed no tariffs but if Japan wanted to sell cars in America they would have to make more of their cars in America.
    Japan’s economy was going gang busters at the time everyone was saying Japan was going to overtake America.
    Most or all the cars, walkmen etc were made in Japan. Workers were working so much overtime the Japanese I heard came up with a word that meant being worked to death.
    But then the Japanese economy slowed taking the real estate bubble with it. Was the slowing caused by Japanese companies not expanding in Japan and instead building plants in America did outsourcing hurt the workers and cause a slowing of the economy?
    Less jobs more unemployment less wages less spending sure Toyota and other companies saved money no overseas transport costs, less taxes.
    Is the cost of lower taxes in Japan offset by the cost of providing healthcare in America assuming that Americans working for Japanese car makers get healthcare.

  2. thingsComeUndone permalink
    April 5, 2009

    I know that cheap oil hurt car sales after gulf war 1 and that hurt demand for japanese cars even as the japanese carmakers building plants here helped our economy. How much was all this stuff a factor in Japan’s lost decade and the Clinton economy I mean cheap oil, Japan creating jobs in America plus Bill cut military spending and worked to balance the budget which made the dollar stronger.
    Japan on the other hand seems to have done what Geithner is doing now which a you point out still has not worked for Japan.
    I would argue the Entire bush Presidency has been a downturn we only went up after the panic selling after 9/11 returned to the market. Which given that everyone thought there might be another terror attack is understandable.
    Still the dow never did get back to where it was under Bill after inflation.
    Anyways I’m wondering if outsourcing good paying auto jobs to America caused the Japanese lost decade and if out sourcing caused or helped cause our downturn.
    Friedmen at the Times I think will be pissed:)

  3. April 6, 2009

    thingsComeUndone:

    Japan was ‘simply’ undone by its bubble bursting- in both real estate and stocks- leaving companies and individuals heavily in debt. The ‘lost decade’ was spent lowering expectations, living within means, and paying off debt.

    I don’t think outsourcing car job to America had any big influence on this.

  4. Formerly T-Bear permalink
    April 6, 2009

    TCU, Keen perceptive observations in your comments. To which should be added, the competition to Japan’s production greatly increased during the time frame of the last twenty years. India’s emergence as a serious economic competitor notably in steel production and heavy industrialization (auto manufacture) as well as China’s emergence as producer of just about everything at levels subsidized by low labour income; in concert acted to undermine Japanese industrial productivity and profit, without which Japan lost the tools necessary for economic recovery, (and subsequently hasn’t). This also applies to intelligence productivity as well, India’s development of IT structures and services is reminiscent of the Irish “Celtic Tiger” economic boom without the labour cost overheads. China’s development coincided with the return of Hong Kong to Chinese authority with considerable development provided by Chinese provisions to Hong Kong economic activity leading up to the return. All this is many times the economic effect of a few factories production in the US although that production is a significant part of the other broader picture.

  5. April 6, 2009

    The good times for the public in Japan never came back. As I understand it the elites just kept high-rolling. Probably the whole point to repeating it here.

  6. daver9 permalink
    April 6, 2009

    Good blog site, lots of intelligent thoughts.But I think formerly T-bear nailed it, Japan’s 10 years of Japan paying off debt and living within its means coupled with India and china emnerging as low cfost competitors. For America, Reforming health care will be critical to our recovery and a big test of long term economic strength. Let’s see if Bayh and the neo dems scuttle a serious change. This is no time for little steps.

  7. skunky permalink
    April 6, 2009

    lost decade? did anyone in Japan starve? pretty sure what was a “lost decade” to us is really only “lost” from the perspective of Japanese bank shareholders and stock market investors. Regular people got along just fine, since they had savings and social services. We don’t have those things, so we’ll probably be worse off, accepting the faulty premise that economic patterns repeat themselves in different places and under different conditions.

  8. jawbone permalink
    April 6, 2009

    daver9–Let’s see if Team Obama can think big on health care reform and not treat Big Insurance the way it has treated Big Banksters. Obama et al say they want to get the “system” back to where it was working for the financial industry. Concerning private health insurance companies (aka healthcare blockade systems), Team Obama doesn’t want to rock their boat. But he does propose some kinds of mandates for individuals to purchase health insurance, possibly with some not clearly defined “pubic option.” Since Chuch Schumer mentioned it could well be run by private insurers, I suggest the public be extremely wary of words, just words, coming from of the DC pols.

    Of course, keeping their boat afloat takes about 30% of every healthcare dollar they manage; Medicare takes 3%; Canadian single payer reportedly takes 1%. Gee, see any cost savings anywhere?

  9. senecal permalink
    April 6, 2009

    I wonder how long Elizabeth will keep her job? Or who called her after she made her remarks and said “Elizabeth. . . WTF?”

    My wife, a hardened political cynic, woke up this AM and said “I’m sorry I cant help it. . . I feel better after BO’s comments about reducing nuclear weapons.” The guy’s a real Wizard of Oz!

  10. April 6, 2009

    Skunky,

    not, it was a lot worse than that. Claiming social services in Japan is difficult and an exercise in humiliation. It’s one of those nations where the theory excedes the practice on such things. In addition, you had women being forced out of the workforce, very few promotions, stagnation and lack of opportunity for the young. To put it in social terms, middle aged people don’t have a lot of sex anymore, because birth control is forbidden and they can’t afford kids.

  11. thingsComeUndone permalink
    April 6, 2009

    Great insights everyone thanks Formerly T-Bear are you changing your name and if so to what may I ask? Ian the low Japanese birth rate is tied to a lower or stable living standard with little chance for advancement?
    Then maybe the increased birth rates for immigrants here is because they are going from a lower to a higher standard of living?
    This idea is very interesting. I agree that when government does not want to do something they put up barriers like paper work.
    But how does Japan humiliate people trying to claim social services?

  12. thingsComeUndone permalink
    April 6, 2009

    Even when you all disagree I’m seeing merit in both positions :)

  13. April 7, 2009

    It’s not the stockholders, they have already been wiped out. It’s not all bondholders, only Goldman Sachs or people who owe them money.

  14. Formerly T-Bear permalink
    April 7, 2009

    TCU, an observation, large families are associated with poverty and survival of the family, children were put to work early providing services (and income) necessary for the families wellbeing. It happens that economic wellbeing is the driving force behind the appearance of small families, survival appears assured, the share of wellbeing per child is enhanced by having fewer children. Since there are exceptionally few examples of societies going from wealth to poverty (arguably the population of the former Soviet Union the sole example, the demographics show different near-term outcomes e.g. decrease in life expectancy, etc.) to provide such guidance. IIRC Japan had a very high rate of saving as a consequence of its modern history, deferring consumption in favor of the security of savings. The collapse of the Japanese economy further enhanced this drive. What long term effect this will have on the size of Japanese families is unknown, but assuredly it was the wealth provided by the Japanese economic miracle that curtailed family size as it did in all other countries enjoying enough social wealth. So your observation of immigrant families may be the reverse of your statement, the large families are an artifact of prior poverty and will disappear as those people are assimilated and begin to experience greater wealth and security. Also consider just how expensive having a child is in more prosperous countries which can be a great deterrent to large sized families.

    From earlier comment, please also note the unusual circumstance the economic crisis in the Pacific rim came about. The success of the Pacific “Tiger” economies was founded on either extractive (Indonesian) economic exploitation or exploitation of populations of low income for labour. The absolute success of these economic “Tigers” attracted the interests of large financial accumulations of wealth in search of an (unearned) return for that wealth. Such was the activity the phenomenon of ever increasing heights to buildings (cathedrals) housing economic giants became widespread throughout these economic capitals. Concurrently, there were quiet discussions about the Japanese Yen and its power against the then instability of the dollar (then being manipulated to increase economic export of the US). For little discernible reason, “capital flight” from these here-to-fore successful economic engines “happened”; with the disappearance, credit required for economic production was exterminated, bringing each of the “Tigers” to their economic knees, economic strangulation by “finance”. Interestingly, when turning to the World Bank and IMF for aid to restore credit necessary for economic production, only those refusing the administrations of WB and IMF able to salvage and restore much of their economic prowess but not to the previous levels. Like dominoes, the “Tiger” economies toppled and ultimately brought down Japan as well, the powerhouse of the Yen was economically displaced and never recovered their economic status. The resulting “lost decades” are a result of, not a cause of Japan’s current economic malaise – the economic price of inflicted debt; the destruction of economic credit.

    FWIW, the “Formerly …” was to indicate where I once commentated, nothing more.

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