Why The World Will Avoid Armageddon

Fast Action Will Prevent Disaster
Heizo Takenaka, Keio University professor and former Japanese minister of economic and fiscal policy, shares his views on why America won't experience its own "lost decade."

The situation is very serious, there's no question about that. But I actually think that Paulson and Bernanke deserve considerable credit for what they've managed to do so far. They've been proactive, reacting very quickly to each situation. The only way to solve these problems is by acting fast. In this sense the U.S. government is doing the right thing. In Japan we ended up taking ten years before we really started to tackle nonperforming assets.

There's no magic solution. It will take a case-by-case approach. I realize that some markets players have been accusing Paulson of inconsistency. He decided to help AIG but let Lehman Brothers go under. But that's not really inconsistent. Lehman was on the verge of insolvency, but the possibility of its collapse didn't really pose a risk to the system as a whole. AIG did. You have to make those distinctions. Paulson understands these things. He knows the market well. We're lucky that he's the secretary of the Treasury right now.

Contrary to popular belief, so far this hasn't really been a banking crisis. The institutions that have gotten into trouble handle a broad range of financial instruments. Lehman Brothers, AIG—these aren't banks in the sense of institutions that use their deposits as the basis for settlement transactions. Real banks, in this sense, are the sinews of the economy. If they become affected, then we'll find ourselves in an even more serious stage of the crisis. Then the economy as a whole could begin to seize up. We experienced that sort of systemic threat here in Japan in 2001-02. It's the kind of situation where you have to be very tough. But we're not there yet. I don't think we've seen the end of this turmoil—not at all—but the overall situation isn't quite that bad yet.

In Japan everyone likes to talk about the possibility that "public money" may have to be used to save troubled companies. The Japanese media use that term in very messy ways. What almost never gets mentioned is that "public money" can be used for very different purposes—either to provide liquidity or to prevent insolvency by providing injections of capital. In the case of Bear Sterns the Fed helped by providing financing or loans that boosted liquidity; the same with AIG. But the government shouldn't be in the business of injecting capital into insurance companies just to save them from bankruptcy. Where capital injections make sense is in the case of banks—and not for the purpose of saving the banks, but in order to preserve the settlement infrastructure. If that becomes damaged it's going to be very hard for the economy to work properly.

Denial, Anger and Acceptance
Angela Knight, chair of the British Bankers Association, on how U.K. banks and regulators are rallying to make the system stronger in the wake of chaos.

The first point to make—which we have been making loudly all week—is that the U.K.'s banks are well capitalized and well run. That said, business is global, and the current economic downturn is a global phenomenon.

In the U.K., this has resulted in the merger of our two major retail banks at an accelerated rate—the speed of events we are still getting used to.

A bubble has burst, and that is never a pleasant experience in any market. We need only look back to the market rout of dotcoms at the start of this century.

Some of the traders who have just come back from their holidays will never have seen a real economic downturn. A 40-year-old who joined a bank from university will never have witnessed a recession in his or her professional life.