John Hussman: We're Speaking Japanese Without Knowing It

Excerpt from the Hussman Funds' Weekly Market Comment (9/21809):

If one seeks analysis about the recent financial crisis, and what most probably lies ahead, it would be wise to place particular weight on the views of economists who saw it coming (and ideally those who provided careful analysis rather than hyperbole). I've cited a paper by Reinhart and Rogoff above, which was published by the National Bureau of Economic Research in January of 2008. At a speech at the Princeton Club last week, economist Carmen Reinhart reiterated that by propping up unhealthy banks, the U.S. is unwittingly committing the same mistakes as the Japanese did in their decade-long stagnation, saying, “These are not zombie loans. They're just non-performing. We're speaking Japanese without knowing it.”

...

After the bubble burst in Japan in 1990, Japanese banks were not compelled to properly disclose their losses either. The predictable result is that the problems resurfaced later, but worse, because they had not been addressed.

This sort of “regulatory forbearance” – setting aside requirements for large loan loss reserves and timely loss disclosure - was helpful during the Latin American debt crisis of the 1980's, but largely because it allowed time for negotiations with countries to restructure debt, first by rescheduling payments, and then ultimately through debt-equity swaps, exit bonds, and other major debt restructuring under the Brady Plan.

Forbearance only works, however, if you're buying time to do something to restructure debt. Instead, we've celebrated bailouts and the easing of reporting requirements as if they are a substitute for restructuring. In my view, this is a mistake that will haunt us.

Comments

[Mistrofan:]

John - while I agree with you, focus on the dollar. Read Eric Sprott comentary here: www.sprott.com/Docs/Ma...

Sep 28 09:46 PM

[rosey99:]

"Reinhart reiterated that by propping up unhealthy banks, the U.S. is unwittingly committing the same mistakes as the Japanese did in their decade-long stagnation. . ."

Reinhart is overly generous in his use of the word "unwitting." It's not like the Japanese experience is some relic of ancient history. All politicians have a primary constituency; a base. Our current crop of anointed ones - of both parties - have merely demonstrated who their real constituents are.

Sep 28 09:54 PM

[Vuke:]

Wow! Thanks for the link. Sprott presents a stunning argument for a dollar decline. Critics will argue coverage for unfunded liabilities will come from future growth, unlikely given the current economic climate.

However much of the world is treading the same path, meaning world-wide devaluations and rising commodity prices.


On Sep 28 09:46 PM Mistrofan wrote:

> John - while I agree with you, focus on the dollar. Read Eric Sprott
> comentary here: www.sprott.com/Docs/Ma...

Sep 28 11:18 PM

[Steven Hansen:]

John,
it is becoming more and more apparent that we are committing the same sins as the Japanese - ZIRP and toxic assets. i suspect these two actually feed on each other.

ZIRP is not a problem by itself - it is a problem the longer it stays. once you leave ZIRP, it destroys the economic foundation you laid for recovery.

The toxic assets are between $0.75 trillion and $1.5 trillion depending on how you look at it. instead of trying to clear it, the banks are trying to best each other in how much money they are earning.

i am praying somebody really knows what they are doing.

Sep 29 09:22 PM

[John Lounsbury:]

John - - -

Here are my trading plans: かう で せる

Steve - - -

You wrote: "i am praying somebody really knows what they are doing."
Aren't you ever the optimist!

Sep 30 12:19 AM

[derryl:]

Vuke, Re: Sprott

When interest payments and other inescapable financial commitments consume all of your net earnings, you have reached terminal debt. The US is there. Taxes and other revenues are less than interest and program spending. Printing money is the only politically acceptable option. It seems that the US$ will decline toward collapse. Unless somebody pulls some kind of magical monetary rabbit out of a hat. Or unless GDP growth and private sector credit expansion accelerate toward infinity.

Sep 30 02:02 AM