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Global Recovery Opportunities and Risks for Asia 23 rd March 2009. Keiichiro Kobayashi Senior Fellow, Research Institute of Economy, Trade and Industry (RIETI). Analysis of the Current Situation.
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Global RecoveryOpportunities and Risks for Asia23rd March 2009 Keiichiro Kobayashi Senior Fellow, Research Institute of Economy, Trade and Industry (RIETI)
Analysis of the Current Situation • Serious damage to balance sheets of financial institutions and firms due to the asset bubble burst • Vicious circle of the Balance Sheet Trap • Depressed domestic demand in the US; • Decreased Asian exports to US; • Economic Downturn
Future Direction – Two Options (1) Expansion of domestic demand in countries other than the US. • Growth led by domestic demand driven by expanded domestic demand in Asia • Increased opportunities from domestic investment in Asia • Stable asset market in Asia are required before the events above can materialize (guaranteed property rights, political stability, minimum government intervention in the markets).
Future Direction – Two Options (2) Clean up the impaired balance sheets of banks and firms in the US • Removing bad assets from the financial system is required to stop the vicious circle of the Balance Sheet Trap. (a) A hard landing, i.e., the collapse of multilateral financial institutions will be effective for adjusting balance sheets. (Example: Bank Holiday in March 1933)
Future Direction – Two Options (b) The government buys bad assets and isolates them from the financial system. - Fair price cannot be set. (Nobody knows the fair price) (c) If the above is impossible, then banks should be nationalized. • - Temporarily nationalize the whole banking system. • (Instead of buying bad assets, take over the financial • institutions with bad assets) - Isolate bad assets, restore the financial institutions, and then re-privatize them.
Future Direction – Two Options • Bad assets are spread across the world. (i.e. European banks hold US securities.) • - Can country-specific domestic policies accomplish the disposal of bad assets? Constructing an international framework based on coordinated action is required before proceeding with the disposal of bad assets. • Message to G20: Coordinated action rather than for fiscal stimulus is required for the disposal of bad assets.