When banks get into a position of knowing they have problem assets, they become quite reluctant to expand their loan portfolios and take on new risk. Oftentimes, the regulators, recognizing that they have dropped the ball in the first place, become overbearing and shackle the banking system. More than two lost decades later, Japan's real estate (land) prices are still falling, and economic growth remains sluggish, intermixed with frequent bouts of recession.
Kick the Can: Too Big To Fail
The financial crisis in the U.S. in '09 was also met with can-kicking. The "Too Big to Fail" (TBTF) banks that were allowed too much leverage in the period leading up to the crisis were all saved with taxpayer dollars. This time, however, the problems were not met head on as they were in '89. In fact, Dodd-Frank has now codified TBTF -- those institutions are now called SIFIs, Systemically Important Financial Institutions. And, America's banks are back to playing the leverage game, this time with complicity from Washington, which depends on them to purchase newly issued debt. By the way, that debt requires no underlying capital, an issue we will see later in this essay that has come to the forefront in Europe.
In the '09 crisis, the shadow banking system (non-deposit taking lenders) was destroyed, and because the remaining small business lenders, America's community banks, still have major asset issues, small business lending has dried up. Today, as in Japan, economic growth is sluggish and the economy continuously flirts with recession. (I can't blame all of the sluggishness in small business lending on the supply side because clearly the demand for small business loans is down due to the uncertain economic outlook that pervades America today.)
Kick the Can: Save the Bondholders
One major mistake of Japan, and of the so-called solution to the '09 financial crisis, is that bondholders of most of these failing institutions, who took the risk of their investments, have not been asked to take the losses. Except for FNMA and FHLMC, even the preferred shareholders of the failed megabanks (
) were saved. Why was it so important to save these stakeholders? Did we really fall for the concept that if their bondholders lost money, then the economy would totally collapse?
Kick the Can: European Bank Stress Tests
Today, Europe's banks are teetering on the edge. This past spring's round of "stress tests" were a joke meant only to assuage the markets. The sovereign foreign holdings of Greek, Irish, Portuguese, Spanish and Italian debt were all counted at par with zero capital required against these assets. It is clear that the European banks are in desperate need of capital, and the shutting down of calls for such capital from knowledgeable and respected individuals doesn't really fool anyone. So, why are the Europeans about to throw good money after bad in a futile attempt to keep Greece from defaulting, and, once again, kicking the can down the road?