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Monday, Sept. 29, 2008

Learning from BOJ's choice to do nothing


BEVERLY HILLS, Calif. — Ben S. Bernanke, the chairman of the U.S. Federal Reserve System, may be dead wrong about the urgent need for the proposed $700 billion that the former professor and his buddy, U.S. Treasury Secretary Hank Paulson, have been peddling to Congress.

Or he may be dead right.

It is also possible that Bernanke might be better equipped to cope with the calm of Princeton than the chaos of crisis. Perhaps, but one thing that Bernanke is certainly not: He is not Japanese.

Bernanke is not only an accredited expert on the causes of and solutions to the Great U.S. Depression of the 1930s, but has also articulated strong public views about the prolonged Japanese recession in the '90s.

To simplify his perspective to the degree possible, the professor believes the worst thing that was done and the worst thing that one could ever do is for the country's central bank to do nothing.

Listen to brand-new Japanese Prime Minister Taro Aso at the outset of his U.N. General Assembly address last week. Did he commence with policy pabulum about the terrorism threat? No, no, no — Aso went right to the point: "Being back in New York, I am reminded of an old saying about bankers. It seems that there are only two types of bankers in the world, bankers with short memories and bankers with no memories."

Reflecting on the current American meltdown, the career politician, who lived through the agonizing Japanese decade, added: "In finance, manias and panics cling together in much the same way that shadows follow objects. Manias invariably develop over time, which then give rise to panic."

The new prime minister then alluded to the past Asian financial crisis: "It was ten years ago, in September no less, that the world saw a nightmare in which liquidity suddenly dried up. For more than the last quarter-century, it seems almost as if manias and panics have performed a never-ending musical rondo every few years, with a large number of countries and markets as their stage, naturally including Tokyo.

"Vociferous arguments on international financial architecture are about to begin once more. Japan is eager to contribute its experiences and its knowledge."

What Aso and his contemporaries learned from their regional financial crisis, not to mention the Japanese stagnation of the '90s, remains to be seen. But for Bernanke, the main lesson from the Japanese experience is the importance of aggressively intervening in the market, not endlessly sucking one's cultural thumb in reluctance or from excessive patience.

Which is precisely what Bernanke believes Japan's central bank did: "Far from being powerless," he said in a thoughtful academic paper and speech in 1999, "the Bank of Japan could achieve a great deal if it were willing to abandon its excessive caution. The Bank of Japan, in cooperation with other government agencies, could do (a great deal) to help promote economic recovery in Japan."

Bernanke brushed aside sniveling or nitpicking objections that the BOJ didn't have the power, or shouldn't use the power, or didn't possess quite the power to do what was needed: "I will say only that I am not here concerned with fine semantic distinctions but rather with the fundamental issue of whether there exist feasible policies to stimulate (Japan)."

Interestingly, the man who is now America's top federal policy economic brainiac then called on the Japanese to demonstrate the resolve of Franklin D. Roosevelt, who was elected president of the United States in 1932 with the mandate to get the country out of the Depression. In the end, the most effective actions he took were the same that Japan needs to take — namely, rehabilitation of the banking system and monetary easing.

But Roosevelt's specific policy actions were, I think, less important than his willingness to be aggressive and to experiment — in short, to do what was necessary to get the country moving again.

In his pointed advice to Japan, one can see the true inner mind of Bernanke at work. History offers very few sheer coincidences, he feels, but many repeat appearances. The Fed chairman clearly is of a mind to believe that a government may be best when it governs least — but this is definitely not the case in a crisis. The Bernankian instinct is driven by the belief that doing almost anything in a very serious crisis is better than doing virtually nothing.

"On the issue of announcement effects," he wrote, "theory and practice suggest that (so-called) 'cheap talk' can in fact sometimes (positively) affect expectations." He also saw no harm with "straightforward and honest dialogue of policymakers with the public."

This is what the world is observing now in the Fed chairman. It is hard to disagree with his overall assessments, his general direction and his basic instinct.

Columnist Tom Plate, a member of the Pacific Council on International Policy, is writing a beginner's guide to Asia. © 2008 Tom Plate


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