Saving and Spending: Banking Crises and Consumer Confidence

‘Saving and Spending: Banking Crises and Consumer Confidence’, the third in this year’s seminar series, ‘Economic Futures: Wealth and Well-Being in the UK and Japan’, could not have been more timely, coming in the wake of the nationalisation of Northern Rock and on the eve of the announcement that the American bank, Bear Stearns, had received emergency funding, raising fears that one of Wall Street’s biggest names was on the brink of collapse.

 

The Chair, Dr Seijiro Takeshita, Director of Mizuho International PLC and a regular television and radio presenter, introduced the speakers referring to Ikuko Samikawa as specialising in banking theory and to Gillian Tett as winner of the 2007 Wincott Award for Senior Financial Journalist of the year. He accurately predicted the complementarity their presentations would achieve.

 

Ikuko Samikawa, Senior Economic Adviser, Embassy of Japan in London, began by relating her surprise, prior to her posting at the Embassy, at the UK’s 16 years of economic expansion. Since her posting to London 14 months ago, however, she in turn became astonished by the ever-escalating house prices and since last summer, finds herself reporting on the difficult economic climate and global credit crunch.

 

Japan experienced a steep increase in land prices in the late 1980s and experienced two troughs: the collapse of the bubble economy in the late 1980s and the banking crisis in the late 1990s. Samikawa went on to say that though it was initially thought that the fall of asset prices in the late 1980s would be temporary, asset prices in fact declined further. As Japan’s central bank delayed cutting rates for almost 18 months and the banks refused to recognise their bad loans the situation was exacerbated, resulting in the ‘lost decade’.

 

It would appear that similarities with the USA and the UK cannot be dismissed lightly and Samikawa referred to the similarity between the collapse of Northern Rock last summer with the collapse of three financial institutions in Japan in 1997, which led to severe credit crunch, reduced consumption, recession and deflation

 

Samikawa finished off with pertinent advice, namely that it is important to recognise the magnitude of crises as soon as possible, that they should not be allowed to drag on and that injections of public money are useful in alleviating public concern, in particular when circumstances are such that this is unavoidable.

 

Gillian Tett, Assistant Editor (Markets) of the Financial Times, followed Samikawa’s macroeconomic and quantitative analysis with a more qualitative assessment suggesting that Japan’s experience in the early 1990s offers a salutary tale in dealing with banking crises. With her background in social anthropology and her experience as the Financial Times Tokyo Bureau Chief in the late 1990s, Tett was amply able to give an insightful account of parallels between the Japanese economic crisis, which she witnessed firsthand, and the current credit crunch crisis.

 

Tett offered two key parallels in the crises – the first being that both crises centred on credit losses (bad loans) rather than hedge fund collapses or scandals – and explained that the former tends to feed through into the entire economy, while the latter results in a loss of investor confidence. As was the case in Japan, the present credit crunch has witnessed much denial and covering up of the losses. Moreover, the Japanese losses were between $700 billion and £1 trillion (depending on the exchange rate) and Tett estimates the US’s credit defaults will amount to the same as well.

 

The second more important parallel is that up until the autumn of 1997, many Western investors and those dealing with Japanese banks did not believe the banks’ published accounts and knew something was awry. Faith in the Japanese ‘convoy system’, the ad hoc arrangement whereby healthier banks intervene to help or absorb insolvent institutions meant that no preventive measures were taken. The convoy system, however, was shown up as being far from impregnable and some banks were allowed to go under. Tett thought she would never see this repeated but is now grappling with a sense of déjà vu with bad loans yet again undermining major banks in the UK and USA.

 

Providing an analogy with sausage making, the repackaging of meat, Tett described securitisation – which has been a factor in the present crisis – as being the cutting, mixing up, repackaging and selling of loans. Faith in this system has now collapsed.

 

There are crucial differences between the crises such as the fact that the West is not beset by deflation; that the USA and Europe were, respectively, enjoying pretty strong and average growth until the crisis; that the crisis is not just affecting Wall Street; and that greater transparency exists this time. These differences are all positive indicators.

 

Tett ended on a hopeful note – stating that there is a chance that the current credit crunch, though it may turn out to be more savage, may be resolved quicker than the Japanese crisis, and by the encouraging news that investor faith does get rebuilt, though it may take a long time.

 

In giving a vote of thanks, Dr Chizu Nakajima, Director of the Cass Business School reflected that the two speakers had successfully complemented each other in helping the audience grasp what had happened in Japan in the 1990s and what can be learnt today from the Japanese experience.

 

Several of the questions asked after the presentations conveyed the audience’s real concern that the Japanese experience of the early 1990s might be replicated in the UK. Moreover, there was a keen interest in what the UK and USA could and should learn from the Japanese experience; what systems, if any, could be introduced to regulate banking excesses and whether the nationalization of Northern Rock had been inevitable.

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