Are people already spending their rebate checks?

[Coronita]

I just got back from fashion valley and also the costco around there. The mall was completely packed and traffic was so bad, it took awhile just to get into the parking lot. If one were to look at the mall activity, you would think what recession?

What gives? People already spending their rebate checks?

[davelj]

The vast majority of people won’t even notice a recession. The typical peak-to-trough decline in GDP is about 2%. A year-over-year decline of 3%-4% in traffic at a mall is a financial disaster because retail profit margins are extremely thin. A small change in traffic and spending is the difference between a profit and a loss for many stores. So unless you’re able to monitor changes in traffic/parking/spending using amazing powers of occular regression, you aren’t going to notice when the economy has turned south by spending time at a shopping mall. You might, however, get a feel for things by talking to the managers of the stores because they are seeing a daily P&L.

Yes, the malls are packed. Yes, we’re in a recession. There’s no mystery or contradiction here. It’s the economics of “the margin” which most people can’t grasp.

[TheBreeze]

One theory is that as people walk away from their homes (and mortgage payments) they rent a cheaper place and actually have more money to spend on other stuff. People aren’t losing their jobs yet, they’re just walking away from their mortgages. However, my guess is that this effect will be more than canceled out by the sharp reduction in HELOC money.

[bsrsharma]

Simpler explanation – Fashion Valley (and even Costco) tends to cater to folks who are not that sensitive to economic cycles. The impact is much more dramatic at lower end first. Try seeing what people are buying at WalMart/KMart etc., My guess is it is mostly consumer staples.

[bsrsharma]

Simpler explanation – Fashion Valley (and even Costco) tends to cater to folks who are not that sensitive to economic cycles. The impact is much more dramatic at lower end first. Try seeing what people are buying at WalMart/KMart etc., My guess is it is mostly consumer staples.

[bsrsharma]

Simpler explanation – Fashion Valley (and even Costco) tends to cater to folks who are not that sensitive to economic cycles. The impact is much more dramatic at lower end first. Try seeing what people are buying at WalMart/KMart etc., My guess is it is mostly consumer staples.

[bsrsharma]

Simpler explanation – Fashion Valley (and even Costco) tends to cater to folks who are not that sensitive to economic cycles. The impact is much more dramatic at lower end first. Try seeing what people are buying at WalMart/KMart etc., My guess is it is mostly consumer staples.

[bsrsharma]

Simpler explanation – Fashion Valley (and even Costco) tends to cater to folks who are not that sensitive to economic cycles. The impact is much more dramatic at lower end first. Try seeing what people are buying at WalMart/KMart etc., My guess is it is mostly consumer staples.

[TheBreeze]

One theory is that as people walk away from their homes (and mortgage payments) they rent a cheaper place and actually have more money to spend on other stuff. People aren’t losing their jobs yet, they’re just walking away from their mortgages. However, my guess is that this effect will be more than canceled out by the sharp reduction in HELOC money.

[TheBreeze]

One theory is that as people walk away from their homes (and mortgage payments) they rent a cheaper place and actually have more money to spend on other stuff. People aren’t losing their jobs yet, they’re just walking away from their mortgages. However, my guess is that this effect will be more than canceled out by the sharp reduction in HELOC money.

[TheBreeze]

One theory is that as people walk away from their homes (and mortgage payments) they rent a cheaper place and actually have more money to spend on other stuff. People aren’t losing their jobs yet, they’re just walking away from their mortgages. However, my guess is that this effect will be more than canceled out by the sharp reduction in HELOC money.

[TheBreeze]

One theory is that as people walk away from their homes (and mortgage payments) they rent a cheaper place and actually have more money to spend on other stuff. People aren’t losing their jobs yet, they’re just walking away from their mortgages. However, my guess is that this effect will be more than canceled out by the sharp reduction in HELOC money.

[ltokuda]

“A small change in traffic and spending is the difference between a profit and a loss for many stores.”

I talked to the owner of my favorite Mexican restaurant: El Burrito Jr. He said that he’s noticed a slow down in business and that he thought we were in a recession. Looks like I’m going to have to eat there twice as much to help out!

[NotCranky]

My wife thinks it will be a good idea for us to save those rebate checks until peak garage sale season. I swear she has never read this blog!

[NotCranky]

My wife thinks it will be a good idea for us to save those rebate checks until peak garage sale season. I swear she has never read this blog!

[NotCranky]

My wife thinks it will be a good idea for us to save those rebate checks until peak garage sale season. I swear she has never read this blog!

[NotCranky]

My wife thinks it will be a good idea for us to save those rebate checks until peak garage sale season. I swear she has never read this blog!

[NotCranky]

My wife thinks it will be a good idea for us to save those rebate checks until peak garage sale season. I swear she has never read this blog!

[ltokuda]

“A small change in traffic and spending is the difference between a profit and a loss for many stores.”

I talked to the owner of my favorite Mexican restaurant: El Burrito Jr. He said that he’s noticed a slow down in business and that he thought we were in a recession. Looks like I’m going to have to eat there twice as much to help out!

[ltokuda]

“A small change in traffic and spending is the difference between a profit and a loss for many stores.”

I talked to the owner of my favorite Mexican restaurant: El Burrito Jr. He said that he’s noticed a slow down in business and that he thought we were in a recession. Looks like I’m going to have to eat there twice as much to help out!

[ltokuda]

“A small change in traffic and spending is the difference between a profit and a loss for many stores.”

I talked to the owner of my favorite Mexican restaurant: El Burrito Jr. He said that he’s noticed a slow down in business and that he thought we were in a recession. Looks like I’m going to have to eat there twice as much to help out!

[ltokuda]

“A small change in traffic and spending is the difference between a profit and a loss for many stores.”

I talked to the owner of my favorite Mexican restaurant: El Burrito Jr. He said that he’s noticed a slow down in business and that he thought we were in a recession. Looks like I’m going to have to eat there twice as much to help out!

[davelj]

The vast majority of people won’t even notice a recession. The typical peak-to-trough decline in GDP is about 2%. A year-over-year decline of 3%-4% in traffic at a mall is a financial disaster because retail profit margins are extremely thin. A small change in traffic and spending is the difference between a profit and a loss for many stores. So unless you’re able to monitor changes in traffic/parking/spending using amazing powers of occular regression, you aren’t going to notice when the economy has turned south by spending time at a shopping mall. You might, however, get a feel for things by talking to the managers of the stores because they are seeing a daily P&L.

Yes, the malls are packed. Yes, we’re in a recession. There’s no mystery or contradiction here. It’s the economics of “the margin” which most people can’t grasp.

[davelj]

The vast majority of people won’t even notice a recession. The typical peak-to-trough decline in GDP is about 2%. A year-over-year decline of 3%-4% in traffic at a mall is a financial disaster because retail profit margins are extremely thin. A small change in traffic and spending is the difference between a profit and a loss for many stores. So unless you’re able to monitor changes in traffic/parking/spending using amazing powers of occular regression, you aren’t going to notice when the economy has turned south by spending time at a shopping mall. You might, however, get a feel for things by talking to the managers of the stores because they are seeing a daily P&L.

Yes, the malls are packed. Yes, we’re in a recession. There’s no mystery or contradiction here. It’s the economics of “the margin” which most people can’t grasp.

[davelj]

The vast majority of people won’t even notice a recession. The typical peak-to-trough decline in GDP is about 2%. A year-over-year decline of 3%-4% in traffic at a mall is a financial disaster because retail profit margins are extremely thin. A small change in traffic and spending is the difference between a profit and a loss for many stores. So unless you’re able to monitor changes in traffic/parking/spending using amazing powers of occular regression, you aren’t going to notice when the economy has turned south by spending time at a shopping mall. You might, however, get a feel for things by talking to the managers of the stores because they are seeing a daily P&L.

Yes, the malls are packed. Yes, we’re in a recession. There’s no mystery or contradiction here. It’s the economics of “the margin” which most people can’t grasp.

[davelj]

The vast majority of people won’t even notice a recession. The typical peak-to-trough decline in GDP is about 2%. A year-over-year decline of 3%-4% in traffic at a mall is a financial disaster because retail profit margins are extremely thin. A small change in traffic and spending is the difference between a profit and a loss for many stores. So unless you’re able to monitor changes in traffic/parking/spending using amazing powers of occular regression, you aren’t going to notice when the economy has turned south by spending time at a shopping mall. You might, however, get a feel for things by talking to the managers of the stores because they are seeing a daily P&L.

Yes, the malls are packed. Yes, we’re in a recession. There’s no mystery or contradiction here. It’s the economics of “the margin” which most people can’t grasp.

[Duck]

I’m chalking it up to the Super Bowl which probably has more economic impact than any “holiday” other than Christmas. Went to Costco this afternoon in Carlsbad and it took me at least 15 minutes to get a parking spot, and that’s a big parking lot. Couldn’t find everything I needed so I also went to Albertson’s and that was nearly as bad. Football is king.

[anxvariety]

Yeah, go to the same mall tomorrow during the Superbowl.. you could gather that we’re in a great depression in what will be a ghost town!

[Geedup]

I’m chalking it up to people waisting time at Fashion Valley not buying anything and going to Costco for a dose of window shopping and free sampling.

[Geedup]

I’m chalking it up to people waisting time at Fashion Valley not buying anything and going to Costco for a dose of window shopping and free sampling.

[Geedup]

I’m chalking it up to people waisting time at Fashion Valley not buying anything and going to Costco for a dose of window shopping and free sampling.

[Geedup]

I’m chalking it up to people waisting time at Fashion Valley not buying anything and going to Costco for a dose of window shopping and free sampling.

[Geedup]

I’m chalking it up to people waisting time at Fashion Valley not buying anything and going to Costco for a dose of window shopping and free sampling.

[anxvariety]

Yeah, go to the same mall tomorrow during the Superbowl.. you could gather that we’re in a great depression in what will be a ghost town!

[anxvariety]

Yeah, go to the same mall tomorrow during the Superbowl.. you could gather that we’re in a great depression in what will be a ghost town!

[anxvariety]

Yeah, go to the same mall tomorrow during the Superbowl.. you could gather that we’re in a great depression in what will be a ghost town!

[anxvariety]

Yeah, go to the same mall tomorrow during the Superbowl.. you could gather that we’re in a great depression in what will be a ghost town!

[Duck]

I’m chalking it up to the Super Bowl which probably has more economic impact than any “holiday” other than Christmas. Went to Costco this afternoon in Carlsbad and it took me at least 15 minutes to get a parking spot, and that’s a big parking lot. Couldn’t find everything I needed so I also went to Albertson’s and that was nearly as bad. Football is king.

[Duck]

I’m chalking it up to the Super Bowl which probably has more economic impact than any “holiday” other than Christmas. Went to Costco this afternoon in Carlsbad and it took me at least 15 minutes to get a parking spot, and that’s a big parking lot. Couldn’t find everything I needed so I also went to Albertson’s and that was nearly as bad. Football is king.

[Duck]

I’m chalking it up to the Super Bowl which probably has more economic impact than any “holiday” other than Christmas. Went to Costco this afternoon in Carlsbad and it took me at least 15 minutes to get a parking spot, and that’s a big parking lot. Couldn’t find everything I needed so I also went to Albertson’s and that was nearly as bad. Football is king.

[Duck]

I’m chalking it up to the Super Bowl which probably has more economic impact than any “holiday” other than Christmas. Went to Costco this afternoon in Carlsbad and it took me at least 15 minutes to get a parking spot, and that’s a big parking lot. Couldn’t find everything I needed so I also went to Albertson’s and that was nearly as bad. Football is king.

[mixxalot]

I made too much income last year to get a rebate which stinks since I paid a boatload in taxes.

[mixxalot]

I made too much income last year to get a rebate which stinks since I paid a boatload in taxes.

[mixxalot]

I made too much income last year to get a rebate which stinks since I paid a boatload in taxes.

[mixxalot]

I made too much income last year to get a rebate which stinks since I paid a boatload in taxes.

[mixxalot]

I made too much income last year to get a rebate which stinks since I paid a boatload in taxes.

[4plexowner]

If they are spending the checks they aren’t spending them at Starbucks, McDonalds or Walmart.

http://www.thestreet.com/s/starbucks-sales-chilled/newsanalysis/food-beverage/10401280.html?puc=googlefi

http://money.cnn.com/2008/01/28/news/companies/mcdonalds_consumerspending/?postversion=2008012813

http://money.cnn.com/news/newsfeeds/articles/djf500/200801290836DOWJONESDJONLINE000325_FORTUNE5.htm

If you were looking for signs that the American consumer is reaching their limit, you might consider these three companies and how their sales are doing.

~

And talking about margins – less than 20% of the population of America has a college degree – I would guess that the people shopping at Mission Valley and Fashion Valley are largely from this 20% or have access to the wallet of one of the 20%ers – ie, whether traffic at the mall is up or down, these malls aren’t representative of where 80% of Americans spend their money

[JerseyGrl]

Toots

I was at the “other mall” in Mission Valley yesterday. Macys, the former Robinson Mays, had lots of prices slashed. I’ll guess that Nordstroms and the high end dept stores at FV had really good sales this weekend. They need something to draw people in.

Target was busy, but my observation is it’s mostly women with little kids, buying kid stuff (diapers, juice, kid junk). I also noticed a “hiring” sign at Target.

[citydweller]

I was at Fashion Valley this weekend and noticed that upstairs at the west end there were 6 empty stores. I’m curious to see how long it takes to get new tenants in these stores.

[citydweller]

I was at Fashion Valley this weekend and noticed that upstairs at the west end there were 6 empty stores. I’m curious to see how long it takes to get new tenants in these stores.

[citydweller]

I was at Fashion Valley this weekend and noticed that upstairs at the west end there were 6 empty stores. I’m curious to see how long it takes to get new tenants in these stores.

[citydweller]

I was at Fashion Valley this weekend and noticed that upstairs at the west end there were 6 empty stores. I’m curious to see how long it takes to get new tenants in these stores.

[citydweller]

I was at Fashion Valley this weekend and noticed that upstairs at the west end there were 6 empty stores. I’m curious to see how long it takes to get new tenants in these stores.

[JerseyGrl]

Toots

I was at the “other mall” in Mission Valley yesterday. Macys, the former Robinson Mays, had lots of prices slashed. I’ll guess that Nordstroms and the high end dept stores at FV had really good sales this weekend. They need something to draw people in.

Target was busy, but my observation is it’s mostly women with little kids, buying kid stuff (diapers, juice, kid junk). I also noticed a “hiring” sign at Target.

[JerseyGrl]

Toots

I was at the “other mall” in Mission Valley yesterday. Macys, the former Robinson Mays, had lots of prices slashed. I’ll guess that Nordstroms and the high end dept stores at FV had really good sales this weekend. They need something to draw people in.

Target was busy, but my observation is it’s mostly women with little kids, buying kid stuff (diapers, juice, kid junk). I also noticed a “hiring” sign at Target.

[JerseyGrl]

Toots

I was at the “other mall” in Mission Valley yesterday. Macys, the former Robinson Mays, had lots of prices slashed. I’ll guess that Nordstroms and the high end dept stores at FV had really good sales this weekend. They need something to draw people in.

Target was busy, but my observation is it’s mostly women with little kids, buying kid stuff (diapers, juice, kid junk). I also noticed a “hiring” sign at Target.

[JerseyGrl]

Toots

I was at the “other mall” in Mission Valley yesterday. Macys, the former Robinson Mays, had lots of prices slashed. I’ll guess that Nordstroms and the high end dept stores at FV had really good sales this weekend. They need something to draw people in.

Target was busy, but my observation is it’s mostly women with little kids, buying kid stuff (diapers, juice, kid junk). I also noticed a “hiring” sign at Target.

[4plexowner]

If they are spending the checks they aren’t spending them at Starbucks, McDonalds or Walmart.

http://www.thestreet.com/s/starbucks-sales-chilled/newsanalysis/food-beverage/10401280.html?puc=googlefi

http://money.cnn.com/2008/01/28/news/companies/mcdonalds_consumerspending/?postversion=2008012813

http://money.cnn.com/news/newsfeeds/articles/djf500/200801290836DOWJONESDJONLINE000325_FORTUNE5.htm

If you were looking for signs that the American consumer is reaching their limit, you might consider these three companies and how their sales are doing.

~

And talking about margins – less than 20% of the population of America has a college degree – I would guess that the people shopping at Mission Valley and Fashion Valley are largely from this 20% or have access to the wallet of one of the 20%ers – ie, whether traffic at the mall is up or down, these malls aren’t representative of where 80% of Americans spend their money

[4plexowner]

If they are spending the checks they aren’t spending them at Starbucks, McDonalds or Walmart.

http://www.thestreet.com/s/starbucks-sales-chilled/newsanalysis/food-beverage/10401280.html?puc=googlefi

http://money.cnn.com/2008/01/28/news/companies/mcdonalds_consumerspending/?postversion=2008012813

http://money.cnn.com/news/newsfeeds/articles/djf500/200801290836DOWJONESDJONLINE000325_FORTUNE5.htm

If you were looking for signs that the American consumer is reaching their limit, you might consider these three companies and how their sales are doing.

~

And talking about margins – less than 20% of the population of America has a college degree – I would guess that the people shopping at Mission Valley and Fashion Valley are largely from this 20% or have access to the wallet of one of the 20%ers – ie, whether traffic at the mall is up or down, these malls aren’t representative of where 80% of Americans spend their money

[4plexowner]

If they are spending the checks they aren’t spending them at Starbucks, McDonalds or Walmart.

http://www.thestreet.com/s/starbucks-sales-chilled/newsanalysis/food-beverage/10401280.html?puc=googlefi

http://money.cnn.com/2008/01/28/news/companies/mcdonalds_consumerspending/?postversion=2008012813

http://money.cnn.com/news/newsfeeds/articles/djf500/200801290836DOWJONESDJONLINE000325_FORTUNE5.htm

If you were looking for signs that the American consumer is reaching their limit, you might consider these three companies and how their sales are doing.

~

And talking about margins – less than 20% of the population of America has a college degree – I would guess that the people shopping at Mission Valley and Fashion Valley are largely from this 20% or have access to the wallet of one of the 20%ers – ie, whether traffic at the mall is up or down, these malls aren’t representative of where 80% of Americans spend their money

[4plexowner]

If they are spending the checks they aren’t spending them at Starbucks, McDonalds or Walmart.

http://www.thestreet.com/s/starbucks-sales-chilled/newsanalysis/food-beverage/10401280.html?puc=googlefi

http://money.cnn.com/2008/01/28/news/companies/mcdonalds_consumerspending/?postversion=2008012813

http://money.cnn.com/news/newsfeeds/articles/djf500/200801290836DOWJONESDJONLINE000325_FORTUNE5.htm

If you were looking for signs that the American consumer is reaching their limit, you might consider these three companies and how their sales are doing.

~

And talking about margins – less than 20% of the population of America has a college degree – I would guess that the people shopping at Mission Valley and Fashion Valley are largely from this 20% or have access to the wallet of one of the 20%ers – ie, whether traffic at the mall is up or down, these malls aren’t representative of where 80% of Americans spend their money

[jpinpb]

Is US entering Japan’s nightmare?
Japan’s bust started with a real-estate boom, lax lending and the propping up of financial firms — and its recovery took a decade. The Fed’s rate cuts keep the US on the same path.

By Jim Jubak
Ben Bernanke’s Federal Reserve increasingly looks like it’s headed toward a repeat of the errors that took Japan into a decade-long banking crisis and economic slump, beginning in the early 1990s.

Welcome to the United States of Japan, where growth slows to a crawl, the stock market goes nowhere and savings earn nothing. Just in time for the retirement of the baby-boom generation, too.

Japan’s crisis, like the recent one in the United States, began with an extraordinary real-estate boom. In 1987, the price of land in Japan’s three biggest metropolitan areas climbed 44%. Prices went up 12% more in 1988 and then 22% in 1989.

And like the U.S. real-estate boom, the Japanese boom was fueled by cheap money. The Bank of Japan, that country’s Federal Reserve, had lowered the discount rate — the rate it charges other banks — to a post-World War II low of 2.5% from 5% in 1984-87. In those same years, the money supply grew by better than 10% a year.

And even those official numbers don’t capture the full size of the flood of cheap money. Japanese companies, including banks, were able to sell bonds in the European market with an interest rate of 1.5%. When those loans were swapped back into yen, the profits from the swap reduced the cost of money to zero.

As happened in the U.S. real-estate boom, lending standards in Japan collapsed. At the height of the boom, banks regularly made loans for more than 100% of property values. To keep real-estate loans off their books, banks lent through nonbank entities that made the actual loans.

Regulatory oversight took a vacation, too. Japan’s Ministry of Finance allowed companies to include the profits from real-estate speculation in reported earnings. By 1987, Japanese companies made half of their profits from speculative investments in real estate — and the stock market.

As you’d expect in this environment, the Japanese stock market was soaring. The benchmark Nikkei 225 ($N225) index hit 20,000 in 1987, up from 9,000 in 1983, and kept on going. It doubled again over the next two years.

The bursting of Japan’s bubble
And then the Bank of Japan pulled the plug over worries about rising inflation and a fear that asset prices were out of control. Starting in December 1989, the central bank raised interest rates three times in 12 months, to 6%. And the bank’s new chairman, Yasushi Mieno, began talking about his hopes for a gradual 20% reduction in real-estate values over the course of several years.

But when the speculative fires are burning that hot, there’s no way to lower the temperature gradually. In nine months, the Nikkei dropped 48%. Average land prices tumbled 5% by mid-1992, 14% by mid-1994 and 33% by 2000. And they just kept on falling. Japan’s real-estate market didn’t bottom until 2006 — after values had crumbled 70%.

Well before that, Japan’s government and the Bank of Japan panicked. It’s one thing to take the air out of a bubble, and it’s something else to destroy a nation’s financial sector. And that’s what, very quickly, the Bank of Japan believed it was facing.

Video on MSN Money
A platinum play

Gold and platinum are soaring because a power shortage in South Africa has shut the country’s mines; the resulting supply deficit for platinum in 2008 is projected to hit about 200,000 pounds. The big winner may be palladium, a replacement for platinum, says MSN Money’s Jim Jubak.

Because banks had invested so heavily in real estate and the stock market, losses in those two sectors quickly undermined the health of the entire banking system. By the early 1990s, Japanese banks were scrambling to raise enough capital to meet the 8% minimum capital ratio of the Bank of International Settlement.

Propping up the financial firms
The Bank of Japan and the Ministry of Finance decided they had to prop up this house of cards if they could. In June 1990, the ministry gave banks permission to sell junk bonds to raise capital. Some of the money to buy the bank bonds came from the financial subsidiaries of companies that belonged to a bank’s keiretsu, a network of interlocking companies. In this arrangement, it was typical for banks to lend money to these customers at cheap rates and for these companies to then lend the money back to the bank at a slightly higher rate. That bolstered bank balance sheets and generated profits for other members of the keiretsu.

The big banks returned the favor, propping up affiliated financial institutions long past insolvency. In 1994, for example, Mitsubishi Bank first wrote off the interest on money owed to it from two affiliated finance companies, Diamond Mortgage and Diamond Factors, to keep the two companies in business. And later in the year, Mitsubishi bailed out the two affiliates by buying loans from them at face value and then selling off the loans at a loss to its own bottom line.

Continued: A decade of pain

Mitsubishi wasn’t alone. The Ministry of Finance was putting pressure on all the country’s big banks to make more loans to failing institutions, often at no interest, or to buy loans at face value. In 1994, official figures put the nonperforming loans at the country’s 21 biggest banks at $136 billion. If you added in the bad debt from these affiliates, however, the total came to $400 billion.

A day of reckoning that lasted a decade
Eventually, all this asset shuffling and all these accounting gimmicks couldn’t hold off a final reckoning. Even a $70 billion bailout in 1999 wasn’t enough to turn the tide. By 2000, a wave of 25,000 bankruptcies finally rippled through the Japanese economy.

In the fiscal year that ended in March 2000, Tokyo’s big banks sold $20 billion in stock from companies they had propped up, sending the Nikkei stock index down an additional 35% in the last nine months of 2000. That returned the stock market to the lows it had hit a decade ago.

It would take Japan’s economy, stock market and real-estate prices five more years to recover. The final result was more than a decade of slow or no growth in the Japanese economy and in Japanese asset prices.

Will it happen here?
That’s why I worry that the Federal Reserve is going to repeat the mistakes of the Japanese financial crisis of the 1990s. In the third and fourth quarters of 2007, we had the kind of quick write-downs and acquisitions under duress — like Bank of America’s (BAC, news, msgs) deal to buy troubled mortgage lender Countrywide Financial (CFC, news, msgs) — that are required to put a financial disaster relatively quickly to bed. Citigroup (C, news, msgs), Merrill Lynch (MER, news, msgs), Morgan Stanley (MS, news, msgs), Bear Stearns (BSC, news, msgs) and other big banks wrote off billions in asset-backed securities and derivatives that had tumbled in price. The write-offs seemed big enough to account for about half the total of distressed securities at these banks.

But then came the Federal Reserve’s surprise three-quarter-point interest-rate cut on Jan. 21 and a half-point cut Jan. 30. And banks seem to be hoping they can squeeze through again.

If interest rates drop enough, it might be sufficient to support the prices of distressed assets so that banks won’t have to write them down. If interest rates drop enough, banks will be able to raise new capital and avoid having to sell distressed assets at distressed prices. If lower interest rates keep the economy from slowing too much, maybe banks won’t see a big jump in defaults from overstressed corporate and consumer borrowers.

The trouble with wait-and-see
If I were a bank looking at the policies of the Bernanke Federal Reserve, I’d certainly take a wait-and-see attitude. Maybe the Fed will bail out my loan portfolio, I’d think, so I don’t need to take the write-offs now. I’ll wait.

What’s so bad about that? Well, while a bank is waiting and hoping to scrape by, it’s still sitting on billions in “challenged” securities. For example, in its annual 10K filing for 2007 with the Securities and Exchange Commission, Morgan Stanley reclassified $7 billion in assets to Level 3, the riskiest category under new accounting rules and one that says there is no market for these securities and thus no way to publicly value them. Morgan Stanley didn’t take a charge on this accounting shift.

But Morgan Stanley and other banks can’t be certain they won’t have to write off these assets, so it’s prudent, from the banks’ point of view, to take less risk now and make fewer loans. They know the prices on these assets still can’t be trusted, so they’re not about to buy them from other banks or gear up to create more of them in the mortgage market.

How to lessen the pain
By giving banks the hope they can dodge rather than bite the bullet, the Federal Reserve has created the possibility that what would have been a very painful but short lesson for the banks could turn into a long-term drag on the financial markets and the economy.

If banks lend less because they’re spending so much time watching their past mistakes that they shudder at the idea of adding loans to their balance sheets, if nobody trusts the prices for distressed assets, so big parts of the financial markets remain frozen in place, if consumers and corporations with decent credit can’t get new loans to fix bad ones or to expand production or consumption, then the economy will run slower than its potential. And if the Japanese experience is any indication, it will run slower for a very long time.

Video on MSN Money
A platinum play

Gold and platinum are soaring because a power shortage in South Africa has shut the country’s mines; the resulting supply deficit for platinum in 2008 is projected to hit about 200,000 pounds. The big winner may be palladium, a replacement for platinum, says MSN Money’s Jim Jubak.

Slower economic growth and the accompanying low returns to investors from bonds and stocks would be a big problem for a U.S. economy that faces the huge challenge of paying for the looming retirement of the baby-boom generation.

All of which puts me in the very odd position of hoping to see another round of painful write-offs from the big banks at the end of the March quarter. That would help me believe we’re still on the road to putting this mess behind us in a matter of quarters, rather than years.

[jpinpb]

Is US entering Japan’s nightmare?
Japan’s bust started with a real-estate boom, lax lending and the propping up of financial firms — and its recovery took a decade. The Fed’s rate cuts keep the US on the same path.

By Jim Jubak
Ben Bernanke’s Federal Reserve increasingly looks like it’s headed toward a repeat of the errors that took Japan into a decade-long banking crisis and economic slump, beginning in the early 1990s.

Welcome to the United States of Japan, where growth slows to a crawl, the stock market goes nowhere and savings earn nothing. Just in time for the retirement of the baby-boom generation, too.

Japan’s crisis, like the recent one in the United States, began with an extraordinary real-estate boom. In 1987, the price of land in Japan’s three biggest metropolitan areas climbed 44%. Prices went up 12% more in 1988 and then 22% in 1989.

And like the U.S. real-estate boom, the Japanese boom was fueled by cheap money. The Bank of Japan, that country’s Federal Reserve, had lowered the discount rate — the rate it charges other banks — to a post-World War II low of 2.5% from 5% in 1984-87. In those same years, the money supply grew by better than 10% a year.

And even those official numbers don’t capture the full size of the flood of cheap money. Japanese companies, including banks, were able to sell bonds in the European market with an interest rate of 1.5%. When those loans were swapped back into yen, the profits from the swap reduced the cost of money to zero.

As happened in the U.S. real-estate boom, lending standards in Japan collapsed. At the height of the boom, banks regularly made loans for more than 100% of property values. To keep real-estate loans off their books, banks lent through nonbank entities that made the actual loans.

Regulatory oversight took a vacation, too. Japan’s Ministry of Finance allowed companies to include the profits from real-estate speculation in reported earnings. By 1987, Japanese companies made half of their profits from speculative investments in real estate — and the stock market.

As you’d expect in this environment, the Japanese stock market was soaring. The benchmark Nikkei 225 ($N225) index hit 20,000 in 1987, up from 9,000 in 1983, and kept on going. It doubled again over the next two years.

The bursting of Japan’s bubble
And then the Bank of Japan pulled the plug over worries about rising inflation and a fear that asset prices were out of control. Starting in December 1989, the central bank raised interest rates three times in 12 months, to 6%. And the bank’s new chairman, Yasushi Mieno, began talking about his hopes for a gradual 20% reduction in real-estate values over the course of several years.

But when the speculative fires are burning that hot, there’s no way to lower the temperature gradually. In nine months, the Nikkei dropped 48%. Average land prices tumbled 5% by mid-1992, 14% by mid-1994 and 33% by 2000. And they just kept on falling. Japan’s real-estate market didn’t bottom until 2006 — after values had crumbled 70%.

Well before that, Japan’s government and the Bank of Japan panicked. It’s one thing to take the air out of a bubble, and it’s something else to destroy a nation’s financial sector. And that’s what, very quickly, the Bank of Japan believed it was facing.

Video on MSN Money
A platinum play

Gold and platinum are soaring because a power shortage in South Africa has shut the country’s mines; the resulting supply deficit for platinum in 2008 is projected to hit about 200,000 pounds. The big winner may be palladium, a replacement for platinum, says MSN Money’s Jim Jubak.

Because banks had invested so heavily in real estate and the stock market, losses in those two sectors quickly undermined the health of the entire banking system. By the early 1990s, Japanese banks were scrambling to raise enough capital to meet the 8% minimum capital ratio of the Bank of International Settlement.

Propping up the financial firms
The Bank of Japan and the Ministry of Finance decided they had to prop up this house of cards if they could. In June 1990, the ministry gave banks permission to sell junk bonds to raise capital. Some of the money to buy the bank bonds came from the financial subsidiaries of companies that belonged to a bank’s keiretsu, a network of interlocking companies. In this arrangement, it was typical for banks to lend money to these customers at cheap rates and for these companies to then lend the money back to the bank at a slightly higher rate. That bolstered bank balance sheets and generated profits for other members of the keiretsu.

The big banks returned the favor, propping up affiliated financial institutions long past insolvency. In 1994, for example, Mitsubishi Bank first wrote off the interest on money owed to it from two affiliated finance companies, Diamond Mortgage and Diamond Factors, to keep the two companies in business. And later in the year, Mitsubishi bailed out the two affiliates by buying loans from them at face value and then selling off the loans at a loss to its own bottom line.

Continued: A decade of pain

Mitsubishi wasn’t alone. The Ministry of Finance was putting pressure on all the country’s big banks to make more loans to failing institutions, often at no interest, or to buy loans at face value. In 1994, official figures put the nonperforming loans at the country’s 21 biggest banks at $136 billion. If you added in the bad debt from these affiliates, however, the total came to $400 billion.

A day of reckoning that lasted a decade
Eventually, all this asset shuffling and all these accounting gimmicks couldn’t hold off a final reckoning. Even a $70 billion bailout in 1999 wasn’t enough to turn the tide. By 2000, a wave of 25,000 bankruptcies finally rippled through the Japanese economy.

In the fiscal year that ended in March 2000, Tokyo’s big banks sold $20 billion in stock from companies they had propped up, sending the Nikkei stock index down an additional 35% in the last nine months of 2000. That returned the stock market to the lows it had hit a decade ago.

It would take Japan’s economy, stock market and real-estate prices five more years to recover. The final result was more than a decade of slow or no growth in the Japanese economy and in Japanese asset prices.

Will it happen here?
That’s why I worry that the Federal Reserve is going to repeat the mistakes of the Japanese financial crisis of the 1990s. In the third and fourth quarters of 2007, we had the kind of quick write-downs and acquisitions under duress — like Bank of America’s (BAC, news, msgs) deal to buy troubled mortgage lender Countrywide Financial (CFC, news, msgs) — that are required to put a financial disaster relatively quickly to bed. Citigroup (C, news, msgs), Merrill Lynch (MER, news, msgs), Morgan Stanley (MS, news, msgs), Bear Stearns (BSC, news, msgs) and other big banks wrote off billions in asset-backed securities and derivatives that had tumbled in price. The write-offs seemed big enough to account for about half the total of distressed securities at these banks.

But then came the Federal Reserve’s surprise three-quarter-point interest-rate cut on Jan. 21 and a half-point cut Jan. 30. And banks seem to be hoping they can squeeze through again.

If interest rates drop enough, it might be sufficient to support the prices of distressed assets so that banks won’t have to write them down. If interest rates drop enough, banks will be able to raise new capital and avoid having to sell distressed assets at distressed prices. If lower interest rates keep the economy from slowing too much, maybe banks won’t see a big jump in defaults from overstressed corporate and consumer borrowers.

The trouble with wait-and-see
If I were a bank looking at the policies of the Bernanke Federal Reserve, I’d certainly take a wait-and-see attitude. Maybe the Fed will bail out my loan portfolio, I’d think, so I don’t need to take the write-offs now. I’ll wait.

What’s so bad about that? Well, while a bank is waiting and hoping to scrape by, it’s still sitting on billions in “challenged” securities. For example, in its annual 10K filing for 2007 with the Securities and Exchange Commission, Morgan Stanley reclassified $7 billion in assets to Level 3, the riskiest category under new accounting rules and one that says there is no market for these securities and thus no way to publicly value them. Morgan Stanley didn’t take a charge on this accounting shift.

But Morgan Stanley and other banks can’t be certain they won’t have to write off these assets, so it’s prudent, from the banks’ point of view, to take less risk now and make fewer loans. They know the prices on these assets still can’t be trusted, so they’re not about to buy them from other banks or gear up to create more of them in the mortgage market.

How to lessen the pain
By giving banks the hope they can dodge rather than bite the bullet, the Federal Reserve has created the possibility that what would have been a very painful but short lesson for the banks could turn into a long-term drag on the financial markets and the economy.

If banks lend less because they’re spending so much time watching their past mistakes that they shudder at the idea of adding loans to their balance sheets, if nobody trusts the prices for distressed assets, so big parts of the financial markets remain frozen in place, if consumers and corporations with decent credit can’t get new loans to fix bad ones or to expand production or consumption, then the economy will run slower than its potential. And if the Japanese experience is any indication, it will run slower for a very long time.

Video on MSN Money
A platinum play

Gold and platinum are soaring because a power shortage in South Africa has shut the country’s mines; the resulting supply deficit for platinum in 2008 is projected to hit about 200,000 pounds. The big winner may be palladium, a replacement for platinum, says MSN Money’s Jim Jubak.

Slower economic growth and the accompanying low returns to investors from bonds and stocks would be a big problem for a U.S. economy that faces the huge challenge of paying for the looming retirement of the baby-boom generation.

All of which puts me in the very odd position of hoping to see another round of painful write-offs from the big banks at the end of the March quarter. That would help me believe we’re still on the road to putting this mess behind us in a matter of quarters, rather than years.

[jpinpb]

Is US entering Japan’s nightmare?
Japan’s bust started with a real-estate boom, lax lending and the propping up of financial firms — and its recovery took a decade. The Fed’s rate cuts keep the US on the same path.

By Jim Jubak
Ben Bernanke’s Federal Reserve increasingly looks like it’s headed toward a repeat of the errors that took Japan into a decade-long banking crisis and economic slump, beginning in the early 1990s.

Welcome to the United States of Japan, where growth slows to a crawl, the stock market goes nowhere and savings earn nothing. Just in time for the retirement of the baby-boom generation, too.

Japan’s crisis, like the recent one in the United States, began with an extraordinary real-estate boom. In 1987, the price of land in Japan’s three biggest metropolitan areas climbed 44%. Prices went up 12% more in 1988 and then 22% in 1989.

And like the U.S. real-estate boom, the Japanese boom was fueled by cheap money. The Bank of Japan, that country’s Federal Reserve, had lowered the discount rate — the rate it charges other banks — to a post-World War II low of 2.5% from 5% in 1984-87. In those same years, the money supply grew by better than 10% a year.

And even those official numbers don’t capture the full size of the flood of cheap money. Japanese companies, including banks, were able to sell bonds in the European market with an interest rate of 1.5%. When those loans were swapped back into yen, the profits from the swap reduced the cost of money to zero.

As happened in the U.S. real-estate boom, lending standards in Japan collapsed. At the height of the boom, banks regularly made loans for more than 100% of property values. To keep real-estate loans off their books, banks lent through nonbank entities that made the actual loans.

Regulatory oversight took a vacation, too. Japan’s Ministry of Finance allowed companies to include the profits from real-estate speculation in reported earnings. By 1987, Japanese companies made half of their profits from speculative investments in real estate — and the stock market.

As you’d expect in this environment, the Japanese stock market was soaring. The benchmark Nikkei 225 ($N225) index hit 20,000 in 1987, up from 9,000 in 1983, and kept on going. It doubled again over the next two years.

The bursting of Japan’s bubble
And then the Bank of Japan pulled the plug over worries about rising inflation and a fear that asset prices were out of control. Starting in December 1989, the central bank raised interest rates three times in 12 months, to 6%. And the bank’s new chairman, Yasushi Mieno, began talking about his hopes for a gradual 20% reduction in real-estate values over the course of several years.

But when the speculative fires are burning that hot, there’s no way to lower the temperature gradually. In nine months, the Nikkei dropped 48%. Average land prices tumbled 5% by mid-1992, 14% by mid-1994 and 33% by 2000. And they just kept on falling. Japan’s real-estate market didn’t bottom until 2006 — after values had crumbled 70%.

Well before that, Japan’s government and the Bank of Japan panicked. It’s one thing to take the air out of a bubble, and it’s something else to destroy a nation’s financial sector. And that’s what, very quickly, the Bank of Japan believed it was facing.

Video on MSN Money
A platinum play

Gold and platinum are soaring because a power shortage in South Africa has shut the country’s mines; the resulting supply deficit for platinum in 2008 is projected to hit about 200,000 pounds. The big winner may be palladium, a replacement for platinum, says MSN Money’s Jim Jubak.

Because banks had invested so heavily in real estate and the stock market, losses in those two sectors quickly undermined the health of the entire banking system. By the early 1990s, Japanese banks were scrambling to raise enough capital to meet the 8% minimum capital ratio of the Bank of International Settlement.

Propping up the financial firms
The Bank of Japan and the Ministry of Finance decided they had to prop up this house of cards if they could. In June 1990, the ministry gave banks permission to sell junk bonds to raise capital. Some of the money to buy the bank bonds came from the financial subsidiaries of companies that belonged to a bank’s keiretsu, a network of interlocking companies. In this arrangement, it was typical for banks to lend money to these customers at cheap rates and for these companies to then lend the money back to the bank at a slightly higher rate. That bolstered bank balance sheets and generated profits for other members of the keiretsu.

The big banks returned the favor, propping up affiliated financial institutions long past insolvency. In 1994, for example, Mitsubishi Bank first wrote off the interest on money owed to it from two affiliated finance companies, Diamond Mortgage and Diamond Factors, to keep the two companies in business. And later in the year, Mitsubishi bailed out the two affiliates by buying loans from them at face value and then selling off the loans at a loss to its own bottom line.

Continued: A decade of pain

Mitsubishi wasn’t alone. The Ministry of Finance was putting pressure on all the country’s big banks to make more loans to failing institutions, often at no interest, or to buy loans at face value. In 1994, official figures put the nonperforming loans at the country’s 21 biggest banks at $136 billion. If you added in the bad debt from these affiliates, however, the total came to $400 billion.

A day of reckoning that lasted a decade
Eventually, all this asset shuffling and all these accounting gimmicks couldn’t hold off a final reckoning. Even a $70 billion bailout in 1999 wasn’t enough to turn the tide. By 2000, a wave of 25,000 bankruptcies finally rippled through the Japanese economy.

In the fiscal year that ended in March 2000, Tokyo’s big banks sold $20 billion in stock from companies they had propped up, sending the Nikkei stock index down an additional 35% in the last nine months of 2000. That returned the stock market to the lows it had hit a decade ago.

It would take Japan’s economy, stock market and real-estate prices five more years to recover. The final result was more than a decade of slow or no growth in the Japanese economy and in Japanese asset prices.

Will it happen here?
That’s why I worry that the Federal Reserve is going to repeat the mistakes of the Japanese financial crisis of the 1990s. In the third and fourth quarters of 2007, we had the kind of quick write-downs and acquisitions under duress — like Bank of America’s (BAC, news, msgs) deal to buy troubled mortgage lender Countrywide Financial (CFC, news, msgs) — that are required to put a financial disaster relatively quickly to bed. Citigroup (C, news, msgs), Merrill Lynch (MER, news, msgs), Morgan Stanley (MS, news, msgs), Bear Stearns (BSC, news, msgs) and other big banks wrote off billions in asset-backed securities and derivatives that had tumbled in price. The write-offs seemed big enough to account for about half the total of distressed securities at these banks.

But then came the Federal Reserve’s surprise three-quarter-point interest-rate cut on Jan. 21 and a half-point cut Jan. 30. And banks seem to be hoping they can squeeze through again.

If interest rates drop enough, it might be sufficient to support the prices of distressed assets so that banks won’t have to write them down. If interest rates drop enough, banks will be able to raise new capital and avoid having to sell distressed assets at distressed prices. If lower interest rates keep the economy from slowing too much, maybe banks won’t see a big jump in defaults from overstressed corporate and consumer borrowers.

The trouble with wait-and-see
If I were a bank looking at the policies of the Bernanke Federal Reserve, I’d certainly take a wait-and-see attitude. Maybe the Fed will bail out my loan portfolio, I’d think, so I don’t need to take the write-offs now. I’ll wait.

What’s so bad about that? Well, while a bank is waiting and hoping to scrape by, it’s still sitting on billions in “challenged” securities. For example, in its annual 10K filing for 2007 with the Securities and Exchange Commission, Morgan Stanley reclassified $7 billion in assets to Level 3, the riskiest category under new accounting rules and one that says there is no market for these securities and thus no way to publicly value them. Morgan Stanley didn’t take a charge on this accounting shift.

But Morgan Stanley and other banks can’t be certain they won’t have to write off these assets, so it’s prudent, from the banks’ point of view, to take less risk now and make fewer loans. They know the prices on these assets still can’t be trusted, so they’re not about to buy them from other banks or gear up to create more of them in the mortgage market.

How to lessen the pain
By giving banks the hope they can dodge rather than bite the bullet, the Federal Reserve has created the possibility that what would have been a very painful but short lesson for the banks could turn into a long-term drag on the financial markets and the economy.

If banks lend less because they’re spending so much time watching their past mistakes that they shudder at the idea of adding loans to their balance sheets, if nobody trusts the prices for distressed assets, so big parts of the financial markets remain frozen in place, if consumers and corporations with decent credit can’t get new loans to fix bad ones or to expand production or consumption, then the economy will run slower than its potential. And if the Japanese experience is any indication, it will run slower for a very long time.

Video on MSN Money
A platinum play

Gold and platinum are soaring because a power shortage in South Africa has shut the country’s mines; the resulting supply deficit for platinum in 2008 is projected to hit about 200,000 pounds. The big winner may be palladium, a replacement for platinum, says MSN Money’s Jim Jubak.

Slower economic growth and the accompanying low returns to investors from bonds and stocks would be a big problem for a U.S. economy that faces the huge challenge of paying for the looming retirement of the baby-boom generation.

All of which puts me in the very odd position of hoping to see another round of painful write-offs from the big banks at the end of the March quarter. That would help me believe we’re still on the road to putting this mess behind us in a matter of quarters, rather than years.

[jpinpb]

Is US entering Japan’s nightmare?
Japan’s bust started with a real-estate boom, lax lending and the propping up of financial firms — and its recovery took a decade. The Fed’s rate cuts keep the US on the same path.

By Jim Jubak
Ben Bernanke’s Federal Reserve increasingly looks like it’s headed toward a repeat of the errors that took Japan into a decade-long banking crisis and economic slump, beginning in the early 1990s.

Welcome to the United States of Japan, where growth slows to a crawl, the stock market goes nowhere and savings earn nothing. Just in time for the retirement of the baby-boom generation, too.

Japan’s crisis, like the recent one in the United States, began with an extraordinary real-estate boom. In 1987, the price of land in Japan’s three biggest metropolitan areas climbed 44%. Prices went up 12% more in 1988 and then 22% in 1989.

And like the U.S. real-estate boom, the Japanese boom was fueled by cheap money. The Bank of Japan, that country’s Federal Reserve, had lowered the discount rate — the rate it charges other banks — to a post-World War II low of 2.5% from 5% in 1984-87. In those same years, the money supply grew by better than 10% a year.

And even those official numbers don’t capture the full size of the flood of cheap money. Japanese companies, including banks, were able to sell bonds in the European market with an interest rate of 1.5%. When those loans were swapped back into yen, the profits from the swap reduced the cost of money to zero.

As happened in the U.S. real-estate boom, lending standards in Japan collapsed. At the height of the boom, banks regularly made loans for more than 100% of property values. To keep real-estate loans off their books, banks lent through nonbank entities that made the actual loans.

Regulatory oversight took a vacation, too. Japan’s Ministry of Finance allowed companies to include the profits from real-estate speculation in reported earnings. By 1987, Japanese companies made half of their profits from speculative investments in real estate — and the stock market.

As you’d expect in this environment, the Japanese stock market was soaring. The benchmark Nikkei 225 ($N225) index hit 20,000 in 1987, up from 9,000 in 1983, and kept on going. It doubled again over the next two years.

The bursting of Japan’s bubble
And then the Bank of Japan pulled the plug over worries about rising inflation and a fear that asset prices were out of control. Starting in December 1989, the central bank raised interest rates three times in 12 months, to 6%. And the bank’s new chairman, Yasushi Mieno, began talking about his hopes for a gradual 20% reduction in real-estate values over the course of several years.

But when the speculative fires are burning that hot, there’s no way to lower the temperature gradually. In nine months, the Nikkei dropped 48%. Average land prices tumbled 5% by mid-1992, 14% by mid-1994 and 33% by 2000. And they just kept on falling. Japan’s real-estate market didn’t bottom until 2006 — after values had crumbled 70%.

Well before that, Japan’s government and the Bank of Japan panicked. It’s one thing to take the air out of a bubble, and it’s something else to destroy a nation’s financial sector. And that’s what, very quickly, the Bank of Japan believed it was facing.

Video on MSN Money
A platinum play

Gold and platinum are soaring because a power shortage in South Africa has shut the country’s mines; the resulting supply deficit for platinum in 2008 is projected to hit about 200,000 pounds. The big winner may be palladium, a replacement for platinum, says MSN Money’s Jim Jubak.

Because banks had invested so heavily in real estate and the stock market, losses in those two sectors quickly undermined the health of the entire banking system. By the early 1990s, Japanese banks were scrambling to raise enough capital to meet the 8% minimum capital ratio of the Bank of International Settlement.

Propping up the financial firms
The Bank of Japan and the Ministry of Finance decided they had to prop up this house of cards if they could. In June 1990, the ministry gave banks permission to sell junk bonds to raise capital. Some of the money to buy the bank bonds came from the financial subsidiaries of companies that belonged to a bank’s keiretsu, a network of interlocking companies. In this arrangement, it was typical for banks to lend money to these customers at cheap rates and for these companies to then lend the money back to the bank at a slightly higher rate. That bolstered bank balance sheets and generated profits for other members of the keiretsu.

The big banks returned the favor, propping up affiliated financial institutions long past insolvency. In 1994, for example, Mitsubishi Bank first wrote off the interest on money owed to it from two affiliated finance companies, Diamond Mortgage and Diamond Factors, to keep the two companies in business. And later in the year, Mitsubishi bailed out the two affiliates by buying loans from them at face value and then selling off the loans at a loss to its own bottom line.

Continued: A decade of pain

Mitsubishi wasn’t alone. The Ministry of Finance was putting pressure on all the country’s big banks to make more loans to failing institutions, often at no interest, or to buy loans at face value. In 1994, official figures put the nonperforming loans at the country’s 21 biggest banks at $136 billion. If you added in the bad debt from these affiliates, however, the total came to $400 billion.

A day of reckoning that lasted a decade
Eventually, all this asset shuffling and all these accounting gimmicks couldn’t hold off a final reckoning. Even a $70 billion bailout in 1999 wasn’t enough to turn the tide. By 2000, a wave of 25,000 bankruptcies finally rippled through the Japanese economy.

In the fiscal year that ended in March 2000, Tokyo’s big banks sold $20 billion in stock from companies they had propped up, sending the Nikkei stock index down an additional 35% in the last nine months of 2000. That returned the stock market to the lows it had hit a decade ago.

It would take Japan’s economy, stock market and real-estate prices five more years to recover. The final result was more than a decade of slow or no growth in the Japanese economy and in Japanese asset prices.

Will it happen here?
That’s why I worry that the Federal Reserve is going to repeat the mistakes of the Japanese financial crisis of the 1990s. In the third and fourth quarters of 2007, we had the kind of quick write-downs and acquisitions under duress — like Bank of America’s (BAC, news, msgs) deal to buy troubled mortgage lender Countrywide Financial (CFC, news, msgs) — that are required to put a financial disaster relatively quickly to bed. Citigroup (C, news, msgs), Merrill Lynch (MER, news, msgs), Morgan Stanley (MS, news, msgs), Bear Stearns (BSC, news, msgs) and other big banks wrote off billions in asset-backed securities and derivatives that had tumbled in price. The write-offs seemed big enough to account for about half the total of distressed securities at these banks.

But then came the Federal Reserve’s surprise three-quarter-point interest-rate cut on Jan. 21 and a half-point cut Jan. 30. And banks seem to be hoping they can squeeze through again.

If interest rates drop enough, it might be sufficient to support the prices of distressed assets so that banks won’t have to write them down. If interest rates drop enough, banks will be able to raise new capital and avoid having to sell distressed assets at distressed prices. If lower interest rates keep the economy from slowing too much, maybe banks won’t see a big jump in defaults from overstressed corporate and consumer borrowers.

The trouble with wait-and-see
If I were a bank looking at the policies of the Bernanke Federal Reserve, I’d certainly take a wait-and-see attitude. Maybe the Fed will bail out my loan portfolio, I’d think, so I don’t need to take the write-offs now. I’ll wait.

What’s so bad about that? Well, while a bank is waiting and hoping to scrape by, it’s still sitting on billions in “challenged” securities. For example, in its annual 10K filing for 2007 with the Securities and Exchange Commission, Morgan Stanley reclassified $7 billion in assets to Level 3, the riskiest category under new accounting rules and one that says there is no market for these securities and thus no way to publicly value them. Morgan Stanley didn’t take a charge on this accounting shift.

But Morgan Stanley and other banks can’t be certain they won’t have to write off these assets, so it’s prudent, from the banks’ point of view, to take less risk now and make fewer loans. They know the prices on these assets still can’t be trusted, so they’re not about to buy them from other banks or gear up to create more of them in the mortgage market.

How to lessen the pain
By giving banks the hope they can dodge rather than bite the bullet, the Federal Reserve has created the possibility that what would have been a very painful but short lesson for the banks could turn into a long-term drag on the financial markets and the economy.

If banks lend less because they’re spending so much time watching their past mistakes that they shudder at the idea of adding loans to their balance sheets, if nobody trusts the prices for distressed assets, so big parts of the financial markets remain frozen in place, if consumers and corporations with decent credit can’t get new loans to fix bad ones or to expand production or consumption, then the economy will run slower than its potential. And if the Japanese experience is any indication, it will run slower for a very long time.

Video on MSN Money
A platinum play

Gold and platinum are soaring because a power shortage in South Africa has shut the country’s mines; the resulting supply deficit for platinum in 2008 is projected to hit about 200,000 pounds. The big winner may be palladium, a replacement for platinum, says MSN Money’s Jim Jubak.

Slower economic growth and the accompanying low returns to investors from bonds and stocks would be a big problem for a U.S. economy that faces the huge challenge of paying for the looming retirement of the baby-boom generation.

All of which puts me in the very odd position of hoping to see another round of painful write-offs from the big banks at the end of the March quarter. That would help me believe we’re still on the road to putting this mess behind us in a matter of quarters, rather than years.

[jpinpb]

Is US entering Japan’s nightmare?
Japan’s bust started with a real-estate boom, lax lending and the propping up of financial firms — and its recovery took a decade. The Fed’s rate cuts keep the US on the same path.

By Jim Jubak
Ben Bernanke’s Federal Reserve increasingly looks like it’s headed toward a repeat of the errors that took Japan into a decade-long banking crisis and economic slump, beginning in the early 1990s.

Welcome to the United States of Japan, where growth slows to a crawl, the stock market goes nowhere and savings earn nothing. Just in time for the retirement of the baby-boom generation, too.

Japan’s crisis, like the recent one in the United States, began with an extraordinary real-estate boom. In 1987, the price of land in Japan’s three biggest metropolitan areas climbed 44%. Prices went up 12% more in 1988 and then 22% in 1989.

And like the U.S. real-estate boom, the Japanese boom was fueled by cheap money. The Bank of Japan, that country’s Federal Reserve, had lowered the discount rate — the rate it charges other banks — to a post-World War II low of 2.5% from 5% in 1984-87. In those same years, the money supply grew by better than 10% a year.

And even those official numbers don’t capture the full size of the flood of cheap money. Japanese companies, including banks, were able to sell bonds in the European market with an interest rate of 1.5%. When those loans were swapped back into yen, the profits from the swap reduced the cost of money to zero.

As happened in the U.S. real-estate boom, lending standards in Japan collapsed. At the height of the boom, banks regularly made loans for more than 100% of property values. To keep real-estate loans off their books, banks lent through nonbank entities that made the actual loans.

Regulatory oversight took a vacation, too. Japan’s Ministry of Finance allowed companies to include the profits from real-estate speculation in reported earnings. By 1987, Japanese companies made half of their profits from speculative investments in real estate — and the stock market.

As you’d expect in this environment, the Japanese stock market was soaring. The benchmark Nikkei 225 ($N225) index hit 20,000 in 1987, up from 9,000 in 1983, and kept on going. It doubled again over the next two years.

The bursting of Japan’s bubble
And then the Bank of Japan pulled the plug over worries about rising inflation and a fear that asset prices were out of control. Starting in December 1989, the central bank raised interest rates three times in 12 months, to 6%. And the bank’s new chairman, Yasushi Mieno, began talking about his hopes for a gradual 20% reduction in real-estate values over the course of several years.

But when the speculative fires are burning that hot, there’s no way to lower the temperature gradually. In nine months, the Nikkei dropped 48%. Average land prices tumbled 5% by mid-1992, 14% by mid-1994 and 33% by 2000. And they just kept on falling. Japan’s real-estate market didn’t bottom until 2006 — after values had crumbled 70%.

Well before that, Japan’s government and the Bank of Japan panicked. It’s one thing to take the air out of a bubble, and it’s something else to destroy a nation’s financial sector. And that’s what, very quickly, the Bank of Japan believed it was facing.

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A platinum play

Gold and platinum are soaring because a power shortage in South Africa has shut the country’s mines; the resulting supply deficit for platinum in 2008 is projected to hit about 200,000 pounds. The big winner may be palladium, a replacement for platinum, says MSN Money’s Jim Jubak.

Because banks had invested so heavily in real estate and the stock market, losses in those two sectors quickly undermined the health of the entire banking system. By the early 1990s, Japanese banks were scrambling to raise enough capital to meet the 8% minimum capital ratio of the Bank of International Settlement.

Propping up the financial firms
The Bank of Japan and the Ministry of Finance decided they had to prop up this house of cards if they could. In June 1990, the ministry gave banks permission to sell junk bonds to raise capital. Some of the money to buy the bank bonds came from the financial subsidiaries of companies that belonged to a bank’s keiretsu, a network of interlocking companies. In this arrangement, it was typical for banks to lend money to these customers at cheap rates and for these companies to then lend the money back to the bank at a slightly higher rate. That bolstered bank balance sheets and generated profits for other members of the keiretsu.

The big banks returned the favor, propping up affiliated financial institutions long past insolvency. In 1994, for example, Mitsubishi Bank first wrote off the interest on money owed to it from two affiliated finance companies, Diamond Mortgage and Diamond Factors, to keep the two companies in business. And later in the year, Mitsubishi bailed out the two affiliates by buying loans from them at face value and then selling off the loans at a loss to its own bottom line.

Continued: A decade of pain

Mitsubishi wasn’t alone. The Ministry of Finance was putting pressure on all the country’s big banks to make more loans to failing institutions, often at no interest, or to buy loans at face value. In 1994, official figures put the nonperforming loans at the country’s 21 biggest banks at $136 billion. If you added in the bad debt from these affiliates, however, the total came to $400 billion.

A day of reckoning that lasted a decade
Eventually, all this asset shuffling and all these accounting gimmicks couldn’t hold off a final reckoning. Even a $70 billion bailout in 1999 wasn’t enough to turn the tide. By 2000, a wave of 25,000 bankruptcies finally rippled through the Japanese economy.

In the fiscal year that ended in March 2000, Tokyo’s big banks sold $20 billion in stock from companies they had propped up, sending the Nikkei stock index down an additional 35% in the last nine months of 2000. That returned the stock market to the lows it had hit a decade ago.

It would take Japan’s economy, stock market and real-estate prices five more years to recover. The final result was more than a decade of slow or no growth in the Japanese economy and in Japanese asset prices.

Will it happen here?
That’s why I worry that the Federal Reserve is going to repeat the mistakes of the Japanese financial crisis of the 1990s. In the third and fourth quarters of 2007, we had the kind of quick write-downs and acquisitions under duress — like Bank of America’s (BAC, news, msgs) deal to buy troubled mortgage lender Countrywide Financial (CFC, news, msgs) — that are required to put a financial disaster relatively quickly to bed. Citigroup (C, news, msgs), Merrill Lynch (MER, news, msgs), Morgan Stanley (MS, news, msgs), Bear Stearns (BSC, news, msgs) and other big banks wrote off billions in asset-backed securities and derivatives that had tumbled in price. The write-offs seemed big enough to account for about half the total of distressed securities at these banks.

But then came the Federal Reserve’s surprise three-quarter-point interest-rate cut on Jan. 21 and a half-point cut Jan. 30. And banks seem to be hoping they can squeeze through again.

If interest rates drop enough, it might be sufficient to support the prices of distressed assets so that banks won’t have to write them down. If interest rates drop enough, banks will be able to raise new capital and avoid having to sell distressed assets at distressed prices. If lower interest rates keep the economy from slowing too much, maybe banks won’t see a big jump in defaults from overstressed corporate and consumer borrowers.

The trouble with wait-and-see
If I were a bank looking at the policies of the Bernanke Federal Reserve, I’d certainly take a wait-and-see attitude. Maybe the Fed will bail out my loan portfolio, I’d think, so I don’t need to take the write-offs now. I’ll wait.

What’s so bad about that? Well, while a bank is waiting and hoping to scrape by, it’s still sitting on billions in “challenged” securities. For example, in its annual 10K filing for 2007 with the Securities and Exchange Commission, Morgan Stanley reclassified $7 billion in assets to Level 3, the riskiest category under new accounting rules and one that says there is no market for these securities and thus no way to publicly value them. Morgan Stanley didn’t take a charge on this accounting shift.

But Morgan Stanley and other banks can’t be certain they won’t have to write off these assets, so it’s prudent, from the banks’ point of view, to take less risk now and make fewer loans. They know the prices on these assets still can’t be trusted, so they’re not about to buy them from other banks or gear up to create more of them in the mortgage market.

How to lessen the pain
By giving banks the hope they can dodge rather than bite the bullet, the Federal Reserve has created the possibility that what would have been a very painful but short lesson for the banks could turn into a long-term drag on the financial markets and the economy.

If banks lend less because they’re spending so much time watching their past mistakes that they shudder at the idea of adding loans to their balance sheets, if nobody trusts the prices for distressed assets, so big parts of the financial markets remain frozen in place, if consumers and corporations with decent credit can’t get new loans to fix bad ones or to expand production or consumption, then the economy will run slower than its potential. And if the Japanese experience is any indication, it will run slower for a very long time.

Video on MSN Money
A platinum play

Gold and platinum are soaring because a power shortage in South Africa has shut the country’s mines; the resulting supply deficit for platinum in 2008 is projected to hit about 200,000 pounds. The big winner may be palladium, a replacement for platinum, says MSN Money’s Jim Jubak.

Slower economic growth and the accompanying low returns to investors from bonds and stocks would be a big problem for a U.S. economy that faces the huge challenge of paying for the looming retirement of the baby-boom generation.

All of which puts me in the very odd position of hoping to see another round of painful write-offs from the big banks at the end of the March quarter. That would help me believe we’re still on the road to putting this mess behind us in a matter of quarters, rather than years.

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I don’t think we will see any meaningful slowdown in consumer spending until consumer credit dries up.

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I don’t think we will see any meaningful slowdown in consumer spending until consumer credit dries up.

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I don’t think we will see any meaningful slowdown in consumer spending until consumer credit dries up.

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I don’t think we will see any meaningful slowdown in consumer spending until consumer credit dries up.

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I don’t think we will see any meaningful slowdown in consumer spending until consumer credit dries up.

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