Monday, May 25, 2009

Japan, Korea, Detroit and banker bonuses

It surprises me how few people followed up the logic from my Japan and Korean banking collapse post

Japan and Korea had very similar industrial structures.  You can get into a lather describing differences between Keiretsu and Chaebol – but if you look at the heavy industry and government support and how the finance worked it was all very similar.

When the system broke down in Japan there was never any great recession – but there was never a recovery.  Growth just slowed to anaemic levels and stayed slow for two decades – the lost period.  However the average Japanese person doesn’t have a lot to be unhappy about.  Real wages stayed high, employment, whilst more difficult than in the boom years, remained fairly easy to obtain.  You would describe the situation as malaise – not failure.  The people who think it was a failure are largely people who played the Japanese stock market – which forever looked really cheap, only to get significantly cheaper.  It is my class (stock-investing capitalists) who think of Japan as a failure.

Korea by contrast had a true banking collapse.  The banks were not only insolvent but illiquid.  They could not lend – and several Chaebol crashed and burnt.  Even quite large modern companies (Hynix for example) failed.  Indeed it is only the strongest of the Chaebol that got through (notably Samsung).  

But the Korean experience was considerably worse for Mr and Mrs Soon (and their average Korean family) than it was for Mr and Mrs Watanabe (and their average Japanese family).  In Korea there was a five fold increase in unemployment (admittedly from very low levels) and a very large increase in small business insolvency.  

Korea’s advantage was that it recovered.  

I argued that the problem in Japan was their ability to keep zombie corporations (not zombie banks) alive for decades.  Japan has a “Rip-Van-Winkle” industrial legacy to go along with its absolutely brilliant modern technology industries.  This old industry sucks resources which would better be used by the modern industry.  It makes sense to keep the old industries alive during a deep recession because the resources would otherwise be unemployed.  It makes no sense to keep them alive long term as you wake up 30 years later (as per Rip-Van-Winkle) and lo – you still have the old industrial structure.  

Translate this to America – and the standout yesterday industries are Detroit and mortgage broking.  The US at peak had about 500 thousand mortgage brokers or one per sixty mortgages outstanding.  This was insane – and it has changed.  Detroit also (politely) looks as if it will employ about two thirds as many people (or less) after the bad bits of Chrysler and GM are closed as part of the bankruptcy process.  

I also argued that the problem with Korea was that the banks became totally illiquid and hence were unable to lend at all.  This mattered because not only inefficient Chaebol died – but plenty of good stuff suffered the same fate.  A banking system that cannot lend is indiscriminate about who it kills.  It will result in the death of dodgy businesses – but will also kill perfectly fine businesses that need cash for short term requirements.  

If you want to avoid the really deep malaise that was Korea then keep the banks liquid.  Then at least they will lend to the more worthy borrowers – and whilst industry will die banks can be selective about who they kill.

Killing Detroit whilst bailing out fat-cat bankers is politically unpopular.  If you want to see a justifiably upset victim have a look at this letter from a Dodge dealer.  I don’t think the political sentiment in the letter is accurate – but it is perfectly understandable.  

Likewise there is no end of complaint about bailing out banks so they can continue to pay million dollar bonuses – and the political sentiment in those complaints is accurate and entirely understandable.

So let me say I agree with the unpopular.  I think the Obama administration is right to let Detroit file bankruptcy and to bail out banks.  I know this is unpopular – I just think the outcomes will be better that way.  I am very impressed by an Administration that does things that are so politically offensive but probably ultimately the right thing to do.  That doesn't make the political pill any easier to swallow.



Jonathan said...

Great post as usual. Thanks, John, especially for often swimming against the tide in your analysis.

Anonymous said...


What's your datasource on real wages in Japan?

John Hempton said...

Datasource of real wages is simply looking at dozens of company accounts and noting the average wage bill has not fallen much but there is price deflation.

The source may be wrong in that the non-listed sector may have more wage deflation than the listed sector.

Sorry to do the data anecdotally. Usually that is OK - but I admit sometimes I get it spectacularly wrong on the anecdotes.


Anonymous said...

Bank lending is important, yes, but the U.S. taxpayer is being taken advantage of due to the cozy relationship between top I-bankers and politicians. Couldn't the politicians take a harder line with the banks and still keep lending open? It doesn't make sense to me for so many banks to all but collapse yet much of the top management keep their jobs.

Mark Parker said...

I grew up in the auto industry as the son of a high level GM man. I am saddened to see it fall this far. I don't have a problem with a true bankruptcy; but I am stunned by the governmental hijacking of the process. In my opinion to effectively hand control of the companies to the UAW is purely political corruption.

Alexandra said...


You have made some good points there.
If I understand you correctly, you prefer the Japanese approach to resolving such a crisis, as it keeps people at work which in turn keeps consumption and savings going. The savings fuel the loan market.
I agree that the Japanese solution would do less harm to the average people than the Korean one.
However, I am not sure that this would work in the US.
One reason is that the Japanese model was based on deposits and loans (to industrial enterprises) whereas the US model is based on debt, and debt only that was packaged in derivatives and distributed all over the place.
Then there is also a cultural difference as to the behavior of managers and to their incentives.
And also, the Japanese government did not have to dole out trillions of Yen, they didn't pump up the national debt. In addition, Japan had an oversees market and products that it could sell to that market.
So in essence, there would need to be some modification of the Japanese solution to the US.

Again, a more detailed argument can be found at

Tom Lindmark said...

Good post.

If I understand you, you believe that the banks are being propped up but Detroit is going to wither away.

Agree when it comes to the banks but are you truly certain Detroit is not going to be on life support for a long time?

Anonymous said...

America has a comparative advantage in finance, even after this mess. It has no such advantage in the auto industry. The choice of which to support is obvious.

But What do I Know? said...

A fine discussion of how the structures and choices of the elites can lead to vastly different outcomes in economies. Too many people want to see governmental choices as "good" or "bad" without realizing that any decision will lead to benefits for some and pains for others. Japan has chosen (or has taken) one path and Korea another. Economic theory does not lead to inevitability, and it is folly of Bernanckean proportions to think that there is a "right" way to proceed--there is only a choice of winners and losers (which in itself is not always well-understood.)

Anonymous said...

You think the Obama admin is letting the auto industry go into bankruptcy? Bankrupcty entails secured creditors taking over a company that fails to pay interest on its debt and determining whether to liquidate assets to compensate liability claims or to keep the company operational. The administration is instead keeping an insolvent company operational, subordinating claims in the capital structure, and in doing so undermining contract law. It's ironic that a constitutional lawyer by training subverts the rule of law and it's pathetic that most of the media and international critics of the US decried Bush-Cheney for subverting the Constitution in the name of national security and grabbing power in the wake of 9/11 crisis while Team Obama grabs power in the wake of the financial crisis while undermining the rule of law in the name of political patronage to Big Labor.

MikeT said...


Your overarching thesis when writing about the Japan/Korea example is that the U.S. is not going to turn into another Japan. (I think I've read you correctly...)

One key piece of this puzzle is that Japan turned into the way it did because demand for credit was anemic and low cost deposit funding was huge. This essentially allowed (maybe forced) the banks to support their zombie debtees for years.

Although this is not the case in the U.S. today, do you think we are moving in this direction? Demand for credit is drying up, and as far as I can see, banks are not expanding their balance sheets even as the shadow banking system is collapsing. The savings rate is increasing at the same time. The banks are making big money because the yield curve is very steep, and you are hoping that they can recapitalize very quickly. But, how quickly, and under what circumstances can that change?

It seems to me that given the decreased demand for credit and increasing savings rate, we are turning incrementally more "Japan-like" rather than "Korea-like".

Anonymous said...

The difference between Korea and Japan is that Korea took their lumps (i.e. banks failed) whereas Japan didn't (banks kept on life support). Keeping insolvent banks alive hurts the long term prospects for the economy. Japan is still suffering ongoing malaise almost 20 years later. Korea suffered for a few years and got back on track.

Japanese corporations are doing great. However, the Japanese people are not doing so hot. They have one of the lowest birth rates in the world, have a workforce of which 1/3 is part-time, and a high cost of living.

In terms of bailing out banks vs. letting industry die, what will happen to the millions of people employed by the auto industry? They see Trillions being thrown at banks, and fat-cat salaries for the banks, and unemployment for themselves. The makings of a revolution.

Anonymous said...

Wrong, as usual for your take on banking issues.

To put trillions of dollars of bad debts on the taxpayers' backs instead of writing them off will depress the U.S. for a decade.

You throw all U.S. banks into one pot, and that is wrong. There are plenty of U.S. banks to make loans, but demand is weak and the banks are understandably conservative.

If you want to prop up zombies, forbearance is the way to go. You continually conflate forbearance with taxpayer bailouts, and your contrariness, while charming, is essentially wrongheaded.

The Obama administration plays this same game of being charmingly wrongheaded, and it is getting *very* old. It amounts to fascism-by-charm-offensive, and it is sickening.

Anantha said...

Detroit automakers being put through bankruptcy does not justify bailing out banks on the terms in which they were done.

The economy had feasted on credit. There was far too much debt creation. Supply of credit and consolidation of institutions was necessary to bring a potentially reduced demand and credit supply into balance. In any case, there are enough regular banks around in the country to continue to provide credit to deserving borrowers.

Selective application of bank bailouts and non-transparency of rules/criteria that led to such selectivity were concerns.

Simultaneous decisions on PPIP and suspension of mark-to-market accounting for banks were clearly contradictory. At the same time, mark-to-market was not suspended on the liabilities side of the bank balance-sheets.

Bailing out the banks does not have to mean bailing out managements too.

Cost of bailouts could have been better shared between the public, equity and bond holders.

The conclusion appears hastily stuck in there.

General disclaimer

The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Hempton's recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author.  In particular this blog is not directed for investment purposes at US Persons.