[OPE] Jim O'Neill on Japan's economic hernia II

Gillian Tett's FT article today appears to confirm my "shikin" (in Nihongo,
this means "idle funds") diagnosis - she uses a "enema" metaphor:

The liquidity pipes remain clogged
By Gillian Tett

August 6 2009

....what springs to my mind is a vision of a plumber trying to force water
into a domestic waterflow system whose pipes are badly clogged, if not
broken. To be sure, liquidity is entering the banking pipes. Some is also
trickling out at the end: banks still seem willing to lend to big, reputable
companies (the Western equivalent of Toyota, as it were.) However, numerous
small or risky corporate ventures in the west currently complain that they
cannot get loans. Consumers are facing rising borrowing charges too. Thus,
in the West, as in Japan a decade ago, the liquidity is still not
necessarily flowing to those who need it most. Those pipes remain clogged,
even as water is forced in. That, in turn, raises a fascinating question for
investors and policy makers: where will all that “backflow” of unusued
liquidity, as it were, go? Right now, some seems to be sitting in a quasi
stagnant pool, deposited into reserve accounts with central banks.
Much also seems to be leaking into the government bond markets, or moving
directly there (... )

That is helping to keep long-term yields low, echoing the pattern seen
previously in Japan. However, the backflow may now be creating other side
effects. Right now, most banks seem unwilling to use spare liquidity to
engage in activity that regulators or shareholders might deem risky, in the
lending or capital markets arena. At a meeting of securities analysts in New
York this week, for example, there was discussion about the fact that Wall
Street banks will not even use their spare funds to take short trading
positions in the US treasury market anymore, for fear that this looks too
“risky.” But, while banks sit on their hands in some arenas, in other
corners of the markets, a feeding frenzy is breaking out. Last month, for
example, there was an extraordinary scramble to buy €1bn bonds issued by
Deutsche Postbank, with some $9.2bn of its offers received in just 10
minutes. (Ironically, it seems that many investors now consider bank debt to
be one of the safest instruments on the planet, since the governments can
ill afford to let large banks collapse.) This week an equally crazed
scramble erupted when EADS, the giant aerospace group, sold bonds. That was
doubly remarkable since normally August is an utterly dead market; indeed,
so extraordinary that some bankers are already using the “b” word – bubble –
in relation to these seemingly safe, vanilla assets.
http://www.ft.com/cms/s/0/33dbf8a6-82a3-11de-ab4a-00144feabdc0.html

The double paradox in all this (or, if you prefer, contradiction) for
economic theory is that, firstly, the enormous effort made across three
decades to insure the value of capital assets with a proliferation of dodgy
"risk management schemes" caused a massive financial seizure, creating more
insecurity and not less risk for everybody, and secondly that the current
capital stampede to riskfree, ultrasafe placements is actually compounding
this problem, rather than solving it.

It raises the important question, "what good is this gigantic, almost
incomprehensible web of financial intermediation, if the net result is
economic stagnation?". Well, whatever way you look at it, it looks to me as
though finance has production by the balls.

Jurriaan

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Received on Fri Aug 7 05:33:27 2009