Ray of hope for victims of bubblenomics

Allister Heath
THERE is much to be learnt from Japan’s disastrous performance since it suffered the mother of all bubbles in the late 1980s. Its woes were originally caused by excessive interest rate cuts in reaction to the dollar’s 51 per cent devaluation against the yen between 1985 and 1987, which hurt Japan’s export industries. Huge amounts of liquidity fuelled a crazed property and stock market bubble which brought down the banking system with it when it eventually popped. So far, not so different from our own experience.

But Japan then proceeded to do everything in its power to ensure that it never fully recovered. Faulty accounting standards, Japan’s corporatist industrial system, a misplaced faith in Keynesian pump-priming, a amateurish understanding of how monetary policy works and the authorities’ gross incompetence meant that the crisis was dragged out for years. The West’s reaction to the present crisis hasn’t been as bad; but we have repeated some of its mistakes. The worst is to believe that a crisis caused by debt can be resolved by borrowing even more.

Given all of this, it is encouraging that Japan grew by 1.2 per cent in the third quarter, making it the best performer of all the large rich economies. As ever, the fine print is not as good as the top line. Japan’s GDP fell 8.4 per cent peak to trough, worse than Britain or America. Japan has so far clawed back less than one-quarter of this, roughly comparable with the US and German recovery but better than the UK’s, Stephen Lewis of Monument Securities points out. But at least Japan is showing encouraging signs – good news for all other fellow bubblenomics sufferers. ANALYSIS: P20-21

Karl Marx must be turning in his grave. The government’s latest proposals to regulate bankers’ pay, to be announced on Wednesday in the Queen’s Speech, are being justified in an unusual way: preventing workers from exploiting their bosses.

Lord Myners, the City minister, is – and I paraphrase here – claiming that bank boards and the government need to unite to prevent financial workers from extracting excessively high wages from their employers. Yes, you read that right. It would be hard to picture a Labour minister endorsing such statements in any other industry. The argument is that high-productivity workers – the kind who bring in vast fortunes for their firms and can take business with them when they leave – such as film stars, entertainers, sports stars and top bankers have too much power and their employers too little.

So while the Labour government usually supports more laws increasing the bargaining power of employees, in banking it now claims to want to improve the bargaining power of employers. All of which would be quite amusing if it didn’t have serious anti-competitive consequences.

Smaller banks and financial institutions are often the most aggressive when it comes to paying sign-on or upfront bonuses, a policy which is now banned under the FSA’s guidelines. So the new rules could actually help their larger rivals by making it more difficult for smaller firms to grab the best staff and to break into the market. On the one hand the government is almost openly endorsing the cartelisation of banking – while on the other it is bemoaning the supposed lack of competition in investment banking and the high fees that are being charged. As usual, confusion reigns in Downing Street.