Professor Ulrike Schaede Appears in Newsweek Article
02/10/2009
Adam B. Kushner,
Newsweek
As we wait on pins and needles for the Obama administration's finance-sector rescue plan next week, investors, moguls, and nearly everyone who pays taxes in the United States seem to have an opinion on how it should look. Of course, no matter what kind of banking bailout Washington proposes, people will fight about it from here until a bull market and beyond. But the two biggest crisis-induced nationalizations in world history—Sweden in the early 1990s and Japan in the middle of that decade—suggest that how the bailout works might be less important than when it works. And the longer we wait, the worse off we'll be.
The decade-long Japanese financial crisis is a case study in the error of trepidation. As in America before the 2007 onset of the subprime-mortgage crisis, Japanese banks had become very aggressive about lending to less-than-worthy debtors in 1990, goaded on by a thriving economy that made blowback seem like fanciful dystopian cynicism. Loanees included hyperleveraged corporations and inflated real estate, such as luxe golf courses whose long membership waiting lists suddenly evaporated as clients lost interest in rounds for $400 during a slump.
When Tokyo's stock and real-estate bubble collapsed in 1991, debt overwhelmed these companies, and they began missing bank payments. (Before tougher disclosure laws were enacted by Parliament in 1998, banks were not forced to report loan defaults.) Instead of declaring bankruptcy or petitioning the government for cash, distressed companies asked for credit extensions—which, overwhelmingly, the banks gave to them. Regulators knew what was happening but didn't want to induce a panic, so they took a "wait and see" approach, hoping the market would recover and the companies could pay back their loans, according to Ulrike Schaede, an expert on Japanese business at the University of California, San Diego.
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