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Thursday, December 30, 2010

Heratri Topics Vol.2 "Who Saved Bernanke and Who saved the World?" ~by Sohken Kobayashi

    The world economy certainly stood on the cliff in October, 2008.  In its previous month, September, the U.S. investment bank, Lehman Brothers, went bust and the U.S. major insurance company, AIG, was also about to go bust, but was saved with a massive capital injection from the government, namely it became “nationalized” at the very last minute.  The world economy indeed escaped failing by a paper-thin margin.  Later, Ben Bernanke, Chairman of the FED or the Board of Governors of the Federal Reserve System, said in an interview that October was absolutely critical and we were about to fall into another Great Depression.  The Lehman shock reminded us all of a nightmare of September, 1931, that is, British pounds’ withdrawal from the gold standard system and its following ten-year severe depression.
 
    However, that nightmare did not come true again.  People believed that this was attributed to hard work of Bernannke and his team members as well as to some luck.  This was partially right.  But the truth to be told, one man defended the embankment of the global economy from collapse.  Most of us are unaware of it.  They do not know about him.  But to the people like me who know the truth, this man was like Mozi in the ancient China.
 
    One time, Mozi’s home country was put in a crisis of war with its neighboring country.  If the war began, his country seemed to have no chance to win.  He was neither a king nor a prime minister.  He was merely one of the pundits who did not have any authority or responsibility.  Although not be asked or recognized by anybody, however, he went to the enemy capital for himself alone and concluded very tough negotiations successfully.  Certainly he saved his country from the brink of fall.  But later on his way back to a home town, Mozi was given a despised laugh by a farmer whom he ran into, saying, “Hey, you silly old man!”  The farmer was no way aware of the fact that this silly old man saved lives and fortunes of his family.  Thus the same peaceful days continued for the following days just like the days up until that time. 


Bernanke Shot All the Bullets
          
    What I am describing here, regarding what happened in the U.S. and Europe in 2008, is mainly based upon In FED We Trust by David Wessel, and partly upon On the Brink by Henry Paulson, former Treasury Secretary.  Wessel is an editor of Wall Street Journal, having a weekly column.  He is also a  journalist who won the Pulitzer Prize twice.
 
   September in 2008 was in fact a horrendous month.  Only two or three days after the Lehman Brothers’ collapse, AIG was about to blow up.  AIG was one of the leading insurers in the world, but it was developed into a huge hedge fund.  Its dubious bonds such as CDS or credit default swap became toxic.  But financial institutions across the globe owned quite a lot of them so that if AIG had gone bust following the failure of Lehman brothers, it would have dealt a devastative blow to the global financial system and done irreparable damages to it.  Presumably Bernanke, Paulson, Timothy Geithner, the then president of the New York Fed and current Treasury Secretary, worked tirelessly day and night.  However, a real crisis or bomb was actually coming along in October.

    As above-mentioned, European banks also aggressively purchased the problematic bonds such as sub-prime
loans, which drew attention from the world in the 2008 crisis, and various derivatives.  So, toxic substances of the poisoned-cake-like financial products had been already circulating in their bodies.  As this was proved true, a run on a bank took place in UK for the first time in 100 years.  A whole nation of Iceland virtually collapsed financially in early October.  And Irish government was also desperate to adopt a forbidden measure, namely 100% government guarantee for deposits in Irish banks in order to secure money flow or capital inflow in the country.  Astounded neighboring countries such as Germany rushed to similar measures to counter the Irish one, preventing the outflow of the deposits from German banks.  In such a way, European banks fell into a chaos.

    In early October, the U.S. congress approved the well-known 700-billion bill of TARP or Troubled Asses Relief Program, although the Lower House rejected it once.  U.S. government set up a scheme to bail out U.S. financial institutions by infecting an enormous amount of taxpayers’ money into the system.  But when the fiscal year closed, we found that a quarter of the FED-injected money was actually used to save and secure European banks.  This shows how critical the Europe situation was.  These are the facts behind the initially-quoted remark by Bernanke:  “October was absolutely critical.”
 
    However, it seems to me that he did not talk about everything.  He is a former professor of Princeton University and a specialist of the Great Depression in the 1930s, having a full knowledge of the history of those days.  I suppose he should have known better than he said.  From a historical point of view, a true crisis or bomb was surely not removed yet.

What Really Brought About the 1931 Tragedy?

    In and around 2008, sub-prime loans and other types of toxic bonds spread out in the global financial system in a finely meshed pattern.  “The toxic bonds were too complex to have Bear Sterns fail,” said one expert who was involved in the bankruptcy of this institution a year before Lehman’s fall.
  
    Suppose one core bank of some emerging economy happens to heavily rely on the toxic bonds, and one European country happens to have a high exposure ratio to that emerging market.  If the bank of the emerging country fails, this developed European country would be immediately put in a serious trouble, and thus the entire financial system of the world would be plunged into a chaos.  In actuality we witnessed this happened in autumn last year, when the bubble burst in Mid-East Dubai and its development corporation went bust.  People were scared of the crisis of European financials, because they had huge fiscal investment and loans in Dubai.  European currency, Euro, was on the verge of significant drop.  In other words, European economy as a whole was about to be harshly damaged. 

   This is the way the Great Depression began in 1931.  The Wall Street crash in 1929 autumn was certainly the initial epicenter.  But its real trigger was activated one and half a year later by the failure of Credit Anstalt in a small country of Europe, Austria.  The bank had suffered a body blow in the aftermath of the crash.  Its failure directly hit German economy, bringing down the City of London, a world financial center alongside New York.  Thus, the world economy fell into the Great Crash and suffered from the Great Depression afterwards.

    More than anybody else, for sure, Bernanke was deeply aware and fearful that this would happen again.  According to the estimate of IMF regarding 2008 crisis, a total loss incurred by the U.S. financial institutions’ loans was 2.7 trillion dollars or 240 trillion yen, while the one generated by the Europeans’(and others') was 1.4 trillion dollars or 130 trillion yen.  That it, the total loss was 4.1 trillion dollars or 370 trillion yen.  And it was scattered across the globe, as if time-bombs or mines were planted among global investors and the financial institutions as well.  Therefore, to bail out US and European institutions only was not enough to fix the problem.  Remember the lesson of the Great Depression:  Both US and Europe exhausted energies and did not assure full responsibilities to save even a small country of Austria, and this caused the Great Depression. 

   The situation of 2008 autumn was similar to that of 1931.  Even after the U.S. congress approved the 700 billion dollars or more than 60 trillion yen TARP, the situation was still tensed.  Given such a huge scale of help, there was no way for Bernanke to ask for even an extra penny for injection to the government.  But in the meantime, the clock of the time-bombs in the emerging economies and the rest was ticking away .  These are the facts of history, which show a true meaning of Bernanke’s comment, “October was absolutely critical.” 

 

“Savior” Moves on the Opposite Side of the Pacific
          
    In the meantime, there was a man taking a close look at these events from the other side of the Pacific.  I should rather say that he grasped the real meaning of what was happening.  Seeing through the situation that both U.S. and Europe were too tied up with their own problems to reach out their hands to emerging markets, he moved quickly just like Mozi did in the ancient China.  This man or “Savior,” contacted the then Prime Minister of Japan, Taro Aso, saying, “To prevent financial crisis from occurring in emerging countries, which the West cannot take care of for a while, Japan should urgently provide a huge amount of money with them. 

    Although perhaps Prime Minister Aso did not fully understand the dramatic effect of such a measure, or the gravity of the unfolding events, he anyhow worked to decide to do it, simply because this was Master Okawa’s advice.  A man in charge of implementing this measure in Japan was an assistant director-general of   International Affairs Bureau of Finance Ministry.  Luckily he used to be a classmate of Master Ryuho Okawa, President of Happy Science, in Tokyo University.  He was also a member of priests governing the global financial system or international currency mafia, and sometimes called "the next Mr.Vice-Minister for international affairs” by his fellows in the world.  Needless to say, Master Okawa had no contact with him on this issue, but he was simply no match for Master Okawa in the discussion of their university’s seminar.  So I suppose he must be one of those who understood the significance of Master Okawa’s instruction.
 
    Japanese government took a quick action to decide to provide 100 billion dollars or 10 trillion yen to IMF to help avoid the crisis of emerging markets.  In a moment, the global financial system got assured, and we virtually averted the “global depression” again.  We could see how it worked in a highly-appreciated comment by Strauss-Kahn, Executive Director of IMF on Japan’s decision.

    I think that this is one of Japan’s greatest international contributions or diplomatic achievement based on the leadership and the initiative, which was most dramatically exercised and quite atypical of Japanese in the post-WWII era of Japan.  However, most of the people in the world do not know of the fact or the savior, a present-day Mozi.  

Next Move
          
    As Japan watchers may be aware of it, the savior took half a year to rectify the anti-American thought of Former Prime Minister Yukio Hatoyama, thereby saving the Japan-U.S. relationship from the brink of collapse.  The savior has also worked on current Prime Minister Naoto Kan after he was in power, and led him to take virtually a conservative diplomatic direction, regardless of his true intention.  This way, the savior did his best not to make the Pacific waves more turbulent. 

   The savior is also worried and thinking about how we can do to ease the pain of U.S. economy.  He is contemplating some measures, i.e. Japan’s help to U.S. should take them back to the path to the economic recover and prosperity again.  Although the savior did not specify a next move yet, I guess that one of the measures is that he will lead Japan to higher-yen based economy in the mid term, which gives U.S. a chance of recovery through an expansion of exports with a lower dollar. 

   The present-day savior does not only preach about minds and hearts and happiness in the heaven.  As Old Testament described, the savior is to solve current social and global problems  and to make people happier in the earthly world.


『In FED We Trust: Ben Bernanke's War on the Great Panic』
by David Wessel
The Japanese translation is published by  Asahi Shinbun Publications Inc. 
titled,
"BERNANKE WA TADASHIKATTAKA?"


『On the Brink:
Inside the Race to Stop the Collapse of the Global Financial System 』
by Henry M. Paulson
The Japanese translation is published by  Nikkeibook, 
titled,
"PAULSON KAISOUROKU"


『The Sun Will Always Rise』
by Ryuho Okawa
The outline of what proceeded inside Japan is described in Chapter 5.

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