Monday, July 9, 2012

If you're so smart, why aren't you richer

Two IMF economists, Luc Laeven and Fabien Valencia, say, Curses;

While conventional wisdom would have it that advanced economies with their stronger macroeconomic frameworks and institutional setting would have an edge in crisis resolution, the record thus far supports the opposite: advanced economies have been slow to resolve banking crises, with the average crisis lasting about twice as long as in developing and emerging market economies ....
While differences in initial shocks and financial system size surely contribute to these different outcomes, in a recent working paper (Laeven and Valencia 2012), we suggest that the greater reliance by advanced economies on macroeconomic policies as crisis management tools may delay financial restructuring, with the risk of prolonging the crisis. We refer to this as the ‘curse’ of advanced economies.
Their poster child being 1990s Japan;
Japan is a case in point. Instead of acknowledging the true extent of losses at troubled banks early on, authorities allowed insolvent institutions to continue to operate as “zombie” banks, evergreening bad credits, and using deferred tax accounting to bolster their regulatory capital positions (Caballero et al. 2008). The reluctance of these banks to resolve bad assets contributed to the Japanese lost decade. 
Clearly, they don't think that this time is different;
...the bulk of the cost of this crisis has simply been transferred to the future, in the form of higher public debt and possibly a dampened economic recovery due to residual uncertainty about the health of banks and continued high private sector indebtedness. While monetary policy has avoided an even sharper contraction in economic activity, it has also discouraged more active bank restructuring. The lingering bad assets and uncertainty about the health of financial institutions risk prolonging the crisis and depressing growth for a prolonged period of time. Macroeconomic stabilisation policies should supplement and support, not displace financial restructuring. 

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