A 5-Point Plan for Getting Out of This Mess

In assessing Japan's decade-long, stop-and-start effort to repair the damages caused by its stock and real estate bubbles, Morgan Stanley's Robert Alan Feldman comes up with a plan that can be mimicked by other countries. Let's see how the U.S. matches up:

1. Economic strategy. The nation needs an approach to improving the supply side of the economy, be it through education, capital-deepening, technology or corporate reorganization. Strong corporate governance is a part of national economic strategy. The strategy must be formulated with global economic trends in mind.

United States: The primary missing ingredient for the U.S. is education. The university system here is still considered the best in the world, but the U.S. rates poorly in many other metrics. 0 out of 1.

2. Safety net. Those hurt by economic reforms need assurances that they will not be abandoned. Such assurances must extend to a broad range of the populace. The problem is to give support without falling subject to moral hazard. Areas include deposit insurance, money market confidence, small business support, monetary policy and fiscal spending.

United States: Oddly, Feldman leaves out assurances such as universal healthcare and better unemployment benefits, where Japan is also ahead of the U.S. In the other categories, the Fed and the FDIC have moved in recent months to shore up trouble spots. My score - 0.5 out of 1.

3. Capital injections. Restoring confidence in financial institutions requires public capital injections in many cases. The difficulty is to enforce adequate conditionality on stockholders, employees and management while keeping taxpayers happy and keeping the operations of troubled institutions alive.

United States: Ignoring for the moment the questionable terms of the Citigroup bailout, TARP II has helped restore some confidence in banks, but many analysts believe billions more in support is needed. My score - 0.75 out of 1.

4. Public support. When public money is involved, politics becomes involved too; hence public support for the economic strategy, the fairness of the safety net and the conditionality on capital injections are all essential to achieve public support.

United States: As mentioned above, the U.S. is still behind in improving its safety net for millions of Americans that are not bankers, but Barack Obama's win signals public support for greater government intervention in the economy is not a major issue right now. My score - 0.75 out of 1.

5. Strict asset assessment. Confidence in the financial system cannot return unless depositors and investors believe that asset valuations are correct. Oversight agencies must be sufficiently staffed with expert personnel, and must coordinate closely across bureaucratic lines and across international borders. There must be clear, public standards for asset valuations, and clear rules for how to deal with deviations.

United States: As the WSJ reported Friday, expert personnel is still missing at the Treasury. International coordination has improved but still seems piecemeal, and the issue of toxic asset valuation is wholly unresolved. My score - 0.25 out of 1.

Feldman argues that the five measures above didn't ensure a healthy Japanese economy in recent years, in part because the economic strategy formulated earlier this decade has been abandoned. Still, if you agree with Feldman and his five-point plan, then by my count, the U.S. has moved less than halfway towards creating an environment supportive of economic recovery.

Comments

[Ferdinand E...:]

The university system in the US is "STILL" considered to be the best in the world. Nobody in their right mind could believe this, although admittedly the US has some good schools and students and teachers.

2008 Nov 30 09:24 AM

[ronslim:]

I see that getting rid of the fed and returning sound money is not part of the plan. Any plan that doesn't gets 0.0 by my count.

2008 Nov 30 10:12 AM

[Asbytec:]

Why have the best University system in the world when all the high tech jobs, scientific research, and a lot of skilled labor is over seas? We train way to many lawyers and are losing our health care doctors to run insurance companies. We need a major paradigm shift. Obama calls for the creation of science and industry. I hope he can pull it off.

2008 Nov 30 10:49 AM

[PeteK:]

You are so wrong. Many colleges & Univ are dropping the requirements for entrance due to the lower overall scores of HS students and especially
minorities. The worst example is California. SAT scores are not going to be used due to low scores of most minorities, mainly Mexican & black students. Requirements to Law & Med schools now are base on social
background and other activities, not HS grades. Who knows what else they are to drop for requirement. USA is now rank almost bottom 15% among world high school comparision in most subjects, especially sciences and math.
The teachers' unions are the worst of all time. The are destroying the whole system, and get away with it. Compare to the UAW, same.

2008 Nov 30 10:54 AM

[Did U Think...:]

Your plan implies that if the gov't just "does the right thing" that we can all get out of this easily. This thinking is woefully misguided and is an artifact of the new socialism / nanny state which the USA has become. The gov't is not responsible for the economy and in fact history has always shown that gov't driven economies are inefficient because they let political imperitives drive policy. If that terminology went over your head, it really means that corrupt governments will bail out their politically powerful friends even if it is the worst possible expenditure of public funds.

The US gov't got us in this mess by cramming a privately owed central bank - the federal reserve - and its policy of fractional reserve banking down our throats. This gave regional banks the power to create money from thin air in the form of credit which of course they did to excess and now there is no recourse but to endure a huge crash that will hurt tens of millions in the US and hundreds of millions around the globe.

The only viable fix is to reduce consumption, to let bad debt fail, and to eliminate the federal reserve and fractional reserve banking. On top of that we need to go back to sound currency which is commodity based, gold being the number one choice. This will not be easy, but at this point nothing will be easy. But after 2-4 years of very hard times under this new regime we will again return to sustainable prosperity - not fake hyper prosperity that has been happening in our boom-bust business cycle for the past 35 years since we left the gold standard.

All I have seen in the gov't and in the media are attempts to continue the old way of life through more financial tricks. Sorry, that game is over now and it is over on a worldwide scale. People's expectations need to be reset going forward because the party is now over. Printing more money from thin air will simply result in the debasement of the savings of honest people. Do we really want this?

2008 Nov 30 02:37 PM

[TinyTim:]

"the lower overall scores of HS students. USA is now ranked almost bottom 15% among world high school comparision in most subjects, especially sciences and math.
The teachers' unions are the worst of all time. The are destroying the whole system, and get away with it."

There are many problems with the US grade school system, but I don't think the unions have a lot to do with them. In states with limited union influence, the results are still abysmal.
Also, I don't see how the US university system can be tops when the students going in are low. they simply wouldn't last.

Grade schools are taking on the responsibility of families for teaching kids morals, ethics and common sense. Families that are remiss don't even realize it. Families that do teach typically get upset. This effort detracts from the classroom time for traditional subjects.

Most district schools are able to provide programs that challenge motivated students. These small numbers of motivated students are the ones that make it into good college programs. Unfortunately, the large numbers of unmotivated students are forcing universities to lower entrance and program requirements for retention to keep classes full. This is not a good sign.

2008 Nov 30 03:54 PM

[Vigilance:]

I'm with Ronslim...End the Fed and give us sound money. The Founders wisely gave congress the exclusive power to coin (not print) currency. And that same wonderful document did NOT give congress the power to delegate that power.

2008 Dec 02 10:30 PM