Re: Japan

["J. Barkley Rosser, Jr." <rosserjb@xxxxxxx>]

Geoffrey,
      My my my, most interesting.  I, for one, did not know
large chunks of this.  Did not realize that you were a
"horse's mouth."
      The Japanese crash had lots of repercussions all
over.  I have a couple of papers on some of the aspects.
One was a general crash of many closed-end country funds
in February and March, 1990, which had been heavily bought
in Fall 1989 by Nomura and other Japanese securities firrms,
only to be unloaded on private Japanese investors fleeing the
crash of their stock market after December, 1989, then to be
suckers in the CECF crash a few months later (see Ehsan
Ahmed, Roger Koppl, J. Barkley Rosser, Jr., and Mark V. White,
"Complex Bubble Persistence in Closed-End Country Funds,"
Journal of Economic Behavior and Organization, January 1997,
vol. 32, no. 1, pp. 19-37).
      Another effect, less well-known, was on the forex markets.
There was a bubble in the Yen/DM rate that crashed later in the
spring of 1990.  This is documented in another paper, S. Kirk
Elwood, Ehsan Ahmed, and J. Barkley Rosser, Jr., "State-Space
Estimation of Rational Bubbles in the Yen/Deutsche Mark
Exchange Rate," Weltwirtschaftliches Archiv, 1999, vol. 135,
no. 2, pp. 317-331.
      BTW, I confess sin in the last one in that the methodology
used assumes rational bubbles.  I do not believe in rational
bubbles.  However, I think that if one finds evidence of an alleged
rational bubble then one has almost certainly found some kind
of a bubble.  The method is to look for extremely rapid accelerations
above a measured fundamental.  I accept 30 Post Keynesian
lashes from Paul Davidson....     (PS:  The lead author insisted
on the methodology and the title, a poor excuse I admit...   ).
Barkley Rosser
-----Original Message-----
From: GGard97342@xxxxxx <GGard97342@xxxxxx>
To: POST-KEYNESIAN THOUGHT <pkt@xxxxxxxxxxxxxxxx>
Date: Tuesday, February 29, 2000 12:15 PM
Subject: Re: Japan


>In a message dated 25/02/2000 22:01:56 GMT Standard Time, rosserjb@xxxxxxx
>writes:
>
>> Geoffrey,
>>        Very interesting data source.  It definitely shows a
>>  peak in land prices around 1991 with gradual declines
>>  since.  This contradicts what is in Ito and Iwaisaku.
>>  Barkley Rosser
>
>Barkley,
>
>I remember there are about three other similar sites, but I did not keep a
>note of them.
>
>I answered Basil Moore's message in a hurry, completely forgetting that
some
>important data is already available on the bis.org site. It is BASLE
>COMMITTEE ON BANKING SUPERVISION WORKING PAPERS, No 1 - April 1999. This
>lists the studies done. See particularly page 34.
>
>To recap, the final form of the Basle Accord was agreed in July 1988, and
>Accord had to be fully operative in all banks by the end of their 1992
fiscal
>years. I believe Japanese companies commonly use the calendar year as their
>financial year, so the crucial date was 1st January 1993. It makes sense
>therefore that the fall in property values started in 1991 as a result of
the
>preparations for the 1993 deadline. Llewellyn, in his Jan 1992 article
>illustrated the problem the Japanese banks had by comparing the 1988
figures
>of National Westminster Bank and Dai-Ichi Kangyo. The Tier One capital
>adequacy ratio of Nat West was 6.1%, and that of Dai-Ichi 2.4%. Basle
>requires 4%. The profits of the two banks were virtually identical, but
>Dai-Ichi had assets twice as big to earn them. It could work on a lower
>margin.
>
>I have not kept my workings but my recollection is that I calculated that
>Dai-Ichi could charge a corporate borrower one half of one per cent less
than
>Nat West, and still achieve that same earnings per share, indeed slightly
>more on Llewellyn's figures.
>
>Until Llewellyn's paper I do not think British bank chiefs understood what
>was going on. Although my then status was comparatively junior, I was
briefly
>involved in high level policy making in Barclays Bank in the early 1970s,
and
>even represented the bank at an exclusive high level conference on the
>control of inflation. At that conference - in October 1973 - I argued to
the
>deaf ears of economists and government officials alike the importance of
>capital adequacy ratios in determining the level of the money supply.
>
>Brain work commanded a low status in Barclays, and I reverted to
management,
>where the money was far better. But I saw enough to be able to state that
>although Barclays was the lead bank at that time, technical understanding
was
>not a feature of top management or the board, with a very few notable but
>powerless exceptions. In 1984 I got out of Barclays, probably the last but
>one to abandon ship of those who entered via Barclays' first ever graduate
>recruitment drive in 1952. One remained: Sir John Quinton. He became
Chairman
>and chief executive, the first time the job was held by a person who was
not
>a descendant of one of the old Quaker banking families who created
Barclays.
>
>Quinton publicly complained about the competitive interest rates which
>Japanese banks were offering corporate borrowers in Britain, and which were
>getting them all the good business. He thought the Japanese were
dangerously
>undercharging, obviously not realising the advantage of a low capital
>adequacy ratio. The professional economists employed by Barclays must have
>been equally ignorant. He decided to hit back, dramatically. In May 1988 he
>launched the biggest rights issue in British corporate history -
>£920,000,000. When added to other increased capital resources this fresh
>capital enabled Barclays to expand its balance sheet by almost  £17 billion
>(19 per cent) by the end of the year, to be responsible for 33 per cent of
>the increase in M3, to expand its UK lending by 32 per cent, and to
increase
>its mortgage lending by 51 per cent.
>
>The following year, despite (or because of?) ever higher interest rates,
its
>balance sheet was expanded by a further  £24 billion. This was done while
>high interest rates, the Treasury's favourite homeopathic remedy, were
>supposed to be discouraging borrowing and therefore controlling inflation.
>The staff tell me that there was a corporate target, "Number One by Ninety
>One," but management later denied this. Economists suppose that high
interest
>rates discourage borrowers. They totally underestimate the marketing skills
>of banks, and banks are of course motivated to lend more when rates are
high.
>Every member of Barclays' staff (90,000 people at the peak) had been given
a
>course on selling, and the instruction was backed up by the technique of
>"Management by Objectives." An APR as high as 31% was no hindrance
whatsoever
>to increasing lending.
>
>Quinton moved too soon. If he had waited until 1990 he could have picked up
>the loans the Japanese were trying to get rid off in order to get within
the
>Basle Accord limits. Instead he got the dud loans they would not touch, and
>he lost the whole of the £920,000,000, and more. I have that fact in a hand
>written letter from his successor as Chief Executive, Martin Taylor.
>
>So the Japanese problem had very serious repercussion in Britain too. The
>actions of Quinton and others sent house prices here rocketing, and then in
>1990 came the crash. In the following years hundreds of thousands of people
>became homeless as a direct result of interest rate policy. It is a
>heart-rending tale, and is about to be repeated. Lord Vinson is a member of
>the House of Lords Monetary Policy Committee and was also a director of
>Barclays UK Management Ltd (the subsidiary which runs the domestic banking)
>during the 1980s. He asked the Bank of England to set higher capital
adequacy
>ratio requirements in respect of house loans above 70 per cent of the house
>value because competition was forcing even prudent lenders to concede up
>to100 per cent loans. He was fobbed off.
>
>Apologies if I am repeating what is already well-known to you.
>
>Geoffrey Gardiner
>Knutsford, England, WA16 8QT
>+44 1565 653544
>
>