TOKYO TUTORIAL

BG11022009

TOKYO TUTORIAL

Does anybody actually have any sense of history when it comes to crises?

By Neil George

How many times a day are we either hearing or heaven forbid actually reading about how if left unchecked the current economic recession could end up being the end of days?

Politicos love hyperbole. For them, if they can get enough hoopla to make the media stand up and quote them – then it makes it that much easier for their next campaign.

And while the stimulus legislation is now in committee – we’re now getting bombarded by pitchmen telling us that if we don’t spend 800 or so billion bucks that we might just see the recession now just two-quarters underway last for years if not decades to come – with even more fallout throughout businesses and households throughout the US.

And to make the point – we’re getting some history lessons including from the current president that we’ve seen this before.

Japan is now being used as the poster child for what not to do when the banking system goes bust.

And rightfully so. For if you’ve been around for as long as I have – you’ll recall that Japan had a bit of a bank breakdown due to over-leverage tied to real estate as well as a variety of ill-managed investments around the world.

The result was that Japan had a massive reckoning in the late ‘80s that resulted in banks pretty much shutting down. The fallout came as those same banks stopped lending and everybody from consumers to businesses were severely curtailed in spending, investment which sent the economy into a recession that lasted arguably all the way through to, well, now.

Sure, there have been some blips of growth – but really they’ve bit fits and starts – not sustained solid expansion.

So, when politicos including the current president want and need to make a quick case for spending massive amounts of our money on a so-called stimulus plan – Japan makes for a great case study.

Except that when the story is told about Tokyo’s troubles – from the current president down to those folks rambling around on Capitol Hill – the facts tend to be turned upside down.

The Japan issue came down to banks that couldn’t write down assets to market values because if they did – they’d be broke. So, from real estate to corporate loans – banks were locked up and nobody was willing or able to lend.

And like the current mess in the US – the government knew that it needed to do something to get the economy humming again. So, what was the plan? Massive stimulus spending. Trillions upon trillions of yen was spent on pouring concrete to added unemployment benefits and the list of pet projects went on and on and on.

And guess what? It didn’t work. Sure we saw some blips of expansion in some areas. Construction jobs and some of the ancillary businesses got some cash coming in the door. But it didn’t last.

And it didn’t last or take hold – because the plans did little to force the banks to come clean with their balance sheet woes and did little to nothing to unload or even buyout the bad assets.

So, now we have the current president telling us in prime time that we need to heed the lesson of Japan. We need to do something. But what he doesn’t want to tell us is that Japan did fail in doing nothing – nothing about its strapped banks. And what it did do – did squat for the credit and economic woes.

Not that many Americans have a sense of history – so they’re willing to have hope that our leaders know what they’re doing.

Or do they?

It seems that just maybe that the average American is now catching on to the fact that the folks in the West Wing as well as on Capitol Hill don’t know what they’re doing. The polls this week show a dramatic drop in the approval for the stimulus spending plan – going from 57 percent in favor to just a tick about half.

And as we’re getting more bits and pieces about the breakdown of the near trillion dollar spending plan – it becomes ever more clear – that the plan looks a whole lot more like it was taken right out of the playbook from Tokyo.

How about some highlights?

50-60 billion for food stamps.

4-17 billion in one time checks for Social Security recipients

46 billion in roads and related bits.

139 billion for Medicaid, Medicare and other bits of healthcare spending

82 billion for local elementary and secondary education grants

40 billion in spending for energy development

How much of this has anything to do with cleaning up the balance sheets of the banks around the US and around the world?

Yep – squat.

No wonder the markets are in sell mode again.

Neil George is editor of By George

The above is only opinion and does not represent and/or offer to buy or sell any security and/or any financial advice. The opinions contained may not be suitable for all investors who should consult their own financial adviser before making any investment or other decisions. I may own some of these same securities noted in accounts under my control or for my benefit.

Errors/Omissions: I always welcome being called on facts, figures and commentary from readers and look forward to your feedback. I can be reached by email at njgeorge@att.net or njgeorgejr@gmail.com or at 01-314-616-3325.