Why Not Nationalize U.S. Banks?

February 12, 2009

This idea is gaining adherents.   Today’s New York Times offers yet another editorial endorsing nationalisation, this time by column Nicholas Kristof.  His perspective is based on his experience as Tokyo bureau chief for the Times during much of Japan’s lost decade.  Japan’s precedent seems a good one for the United States, because its economy is second in size to America’s and because politicians and voters there also initially rejected the nationalisation solution, accepting it only after years of deterioration.

I submit that Japan never really recovered from the lost decade.  Real GDP there expanded 4.0% per annum in the decade between 1Q81 and 1Q91 but by just 0.9% per annum in the subsequent eleven years to 1Q02.  Over the 6-1/2 years to 3Q08, growth averaged 1.7% per annum, still less than half the pre-1990’s trend.  If one assumes negative growth of 3.1% last quarter and 2.5% in the current quarter, annualized economic growth in the seven years between 1Q02 and 1Q09 will be just 0.8%, the same as during the “lost decade.”

Japan announced today that domestic corporate goods prices fell 0.2% in the year to January, down from a 2008 peak of 7.4% six months earlier. The January on-year changes for broad liquidity and M3 are -0.3% and +0.9%.  The economy never tolerated a Bank of Japan target rate higher than 0.5%, and such is back at merely 0.1% currently.  Non-energy consumer prices fell 1.6% at a seasonally adjusted annualized rate in the second half of last year.  Japan’s Nikkei closed today at 7707, just 1.4% above the 2003 lowest closing of 7604 and 80% below the all-time peak of 38916 at the end of 1989.  All of these readings point to continuing deflation and a still-broken economy.  Japan’s experience provides no proof that replicating its remedy in the United States will ever restore U.S. growth to the roughly 3.3% trend rate of economic growth enjoyed by the United States in the second half of the 20th century.  As noted in my prior update, it may be that such is an elusive goal that will be never attained no matter what officials try to do.

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

Tags: ,


One Response to “Why Not Nationalize U.S. Banks?”

  1. bgin2end says:

    Wow – that is some heavy stuff – probably should have tabled the scotch before I read that…In any case, I don’t believe that “officials” can fix this. We need to let the banks/American people make their own decisions and then suffer the consequences, for better or for worse. What will happen is innovation, it happened in hierarchical management schemes (Google and Whole Foods) and it will happen in Finance. We can’t stop the dinosaurs from dying, we can only promote and accept their replacement…