Is the Asian Flu Fatal?

Why Asia's economies got sick--and what can be done to cure them.

James K. Glassman from the May 1998 issue

(Page 11 of 11)

Meltzer: And the order of magnitude of that problem is probably in current dollars more than twice the size of the savings and loan problem here at its worst. It affects the whole banking system.

But that problem would be smaller if we had asset prices rising instead of falling. We shouldn't overlook the fact that as long as asset prices are falling or not rising, people say there is no rush to buy any real property because tomorrow it will be cheaper, and nothing much is going to happen to change that.

Litan: I'm just going to make two quick points. One is that in the fourth quarter of 1997, the official total of problem loans in Japan was about $170 billion. Privately, the analysts will tell you the number is anywhere from three to four times that. So let's say in round numbers Japan's banks have $700 billion of problem debt.

In the United States, if you add up all the bank loans to American business--commercial and industrial loans--it's roughly $700 billion. So basically they have the equivalent of our entire commercial and industrial sector [in] bad debt.

The other beauty about an RTC solution, if you could ever do it, is that an RTC in Japan would end up inheriting at least a trillion dollars of real estate assets, which it would then sell. There have been virtually no sales of real estate in Japan for decades. You could open up the real estate market in a tremendous way, not only to foreigners, but to Japanese. Real estate doesn't move in Japan now because there are heavy taxes on the transfer. The government could sell all this real estate without the tax penalty, and could basically reshuffle the deck. It would be a dream come true, but I don't think we'll see it.

Meltzer: When we started to estimate what our savings and loan problem was, we got numbers like $300 billion. When we actually realized it, because we got asset prices to rise, it turned out only to be $150 billion.

Glassman: What kind of political problems here in the United States are going to be caused by Asia exporting its way out of this mess? We have already seen a group in Congress that's defeated fast track [approval for trade agreements], and that protectionist wing seems to be growing.

Lindsey: I think there is going to be a lot of hand wringing and name calling as the trade deficit rises. But I really don't expect to see any serious policy reversals here in the United States, any serious reversions to protectionism on account of this.

Compared to the 1980s, where you had rising trade deficits and rising protectionist pressures, there are two big differences. One, U.S. industries have already been through 10 or 15 years of grueling restructuring. They are just much better poised to face the competitive challenge that's raised by this shift in exchange rates.

Two, because of the Uruguay Round agreements and the establishment of the WTO, we have institutional checks on protectionism that we didn't have in the 1980s. The two popular ways to act out in the 1980s in the face of protectionist pressures were to enter into voluntary restraint agreements or quota agreements with exporting countries and to launch these Section 301 cases, where we threaten to impose unilateral sanctions [against] countries that don't go our way.

But VRAs and Section 301 sanctions are now GATT-illegal, and we have a dispute settlement mechanism that will say so. Although people will fuss and fume about the WTO, we are not going to pull out of it. Those constraints are going to help to keep the protectionists in line this time around.

Mallaby: I think it's basically right that there won't be a shift back towards protectionism. But there might be a different kind of shift, a bigger, more macro kind of shift as a result of this East Asian crisis, which I think will be extremely healthy. There might be more attention directed toward what it is that the Americans in a post-Cold War world really want from the rest of it.

There was a period right after the collapse of the Berlin Wall, and again I suppose with the bursting of the Japanese bubble, when you could characterize a lot of American sentiment towards the outside world as Schadenfreude. We used to be rivaled, and now we're rivaled neither militarily nor economically.

Glassman: You mean joy at someone else's unhappiness.

Mallaby: Yes. Now I would say that there's a new thing. It's not Schadenfreude, it's Schadenangst. Schadenangst is fear at the trouble of your neighbors and rivals. It's become apparent, for example, that a collapsed Soviet Union and a weak Russia can be rather worrying. It can mean loose nukes, it can mean rising nationalist tension, it can mean all sorts of problems about NATO expansion. It can mean lack of cooperation on Bosnia or Iraq or whatever. It's not necessarily a great thing. You want stability in your rival powers.

The same is true of East Asia. It used to be thought, for example, that the trouble in Japan was a great thing because at last America couldreassert economic preeminence. Actually, it turns out that we wish Japan were stronger because then they would be able to help more on the fiscal policy front, absorbing East Asian imports. They would be able to help more with capital flows, boosting Asian currencies by exporting capital into these East Asian economies. They would be able to do more on the monetary side as well. It would be wonderful if Japan were strong again.

I think that America is seeing the need not merely to be
the dominant power in a unipolar world, but to be the dominant power with usefully strong allies. This is an important shift, to use another German phrase, in Weltanschauung, or worldview.

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