Toshio Matsuda, Commentator & Intl Economist

Straight from the Shoulder

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There is much talk flying back and forth about how the $700 billion bailout plan (the use of the equivalent of 75 trillion yen to rescue the floundering U.S. financial sector by buying up toxic debt) is “better than nothing,” “too little too late” and what have you.
Of the 1,479 banks belonging to the Federal Deposit Insurance Corporation (FDIC), the value of “special attention” and “non-performing” loans is now $2.4 trillion (approx. 255 trillion yen). Of the 158 savings and loans banks that also belong to the FDIC, the bad loan scale has reached $756 billion (approx. 80 trillion yen). Simple arithmetic shows that the FDIC “watch list” of risky loans alone has grown to $3.2 trillion (approx. 340 trillion yen).
It was on Sept. 18 that U.S. President George W. Bush, Treasury Secretary Henry Paulson Jr. and Federal Reserve Board Chairman Ben Bernanke announced the aforementioned $700 billion emergency bailout proposal. Just one day before that, meanwhile, the Fed revealed that the total value of America’s interest-bearing debt had topped $51 trillion (approx. 5,400 trillion yen). This, then, is the reason that many observers have chosen to label the scale of this bailout “too little.”
The United States has never seen such a steady stream of major investment banks, some of them key players for over a century, go belly up in this way. This vanishing act by investment banks, institutions that have literally served as importers of overseas capital (a source of money on which the U.S. economy is fated to depend), is a crisis threatening the very survival of the American economic system. In the United States, a nation grounded in free market principles, the government can no longer come to the rescue ? even if the country is in economic crisis. If the truth is told, therefore, while the 75 trillion yen bailout plan may be “better than nothing,” it will not be capable of rescuing the U.S. economy. While a free market is essential for economic growth, this is a double-edged sword characterized by the inability of that system to stave off financial disasters. Within a free economy, perhaps the best “policy” (if that is the right word) when on the verge of economic crisis is to “let things follow their natural course.”
It is true that with an exodus of foreign capital from the U.S., coupled with bankruptcies of investment banks that are so vital for funneling such funds into the country, it hardly taxes the imagination that many believe the talk about how “the U.S. economy will fail.” Yet, no matter how long we wait, the American economy refuses to go bust. The 300 million or more people living there continue to eat, clothe themselves and generally live their lives, for better or worse. The 12-lane freeways in Los Angeles are perennially jammed with hundreds of thousands of cars, investors continue to look to Wall Street and airplanes remain fully booked for the large part.
At length, rather than the doomsday scenario of the U.S. economy going under, people will begin to place greater faith in their own eyes ? “seeing is believing.” In this way, foreign capital will begin to flow back to U.S. shores, while all the books claiming that the “U.S. is finished” will be pulled from store shelves. When it comes to the economy, the most dominating and decisive force is the “invisible mover” of the so-called “self-regulation function.”

At a time when the foreign capital is taking flight from the U.S. market, even limited amounts (like 75 trillion yen) of rescue capital will need to be supplied from domestic U.S. taxpayer revenues. Because the U.S. House of Representatives refused to obediently fall into line behind this plan, the New York stock market dived on Sept. 29. This, however, should be viewed as the market pressuring on the U.S. Congress to “take responsibility for the plummet.” In other words, it is a manifestation of the compelling force that the market brings to bear against the political scene. Eventually, legislators will behave like sheep in aligning themselves with the market forces.

On a related front, with this recent crash in U.S. stocks, global capital will start to make its way to Japan in search of greater security. The rise in the yen is proof of this! Could this be a case of the old proverb, “Everything comes to those who wait”? We’ll have to see.