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Global Recovery Opportunities and Risks for Asia 23 rd March 2009

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 Recovery Opportunities and Risks for Asia 23 rd March 2009

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  1. Global RecoveryOpportunities and Risks for Asia23rd March 2009 Keiichiro Kobayashi Senior Fellow, Research Institute of Economy, Trade and Industry (RIETI)

  2. 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

  3. 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).

  4. 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)

  5. 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.

  6. 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.

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