I missed this column from earlier in the week, but writer Kenichi Ohmae has a nice piece in the FT on the three stages to expect in the current credit crisis. He models it on what happened to Japan during its crisis, pointing out remediation is about doing the right things at the right time.
From the experience of Japan, the major financial crisis will go through three phases, each requiring a different measure. The first phase is what the US is now experiencing, and that is mainly coming from the liquidity crisis. FRB has provided a credit line close to $1 trillion and major institutions are now at the mercy of this facility. We lost Yamaichi and Sanyo Securities during the first phase of the crisis because they could not pull money from the inter-bank facilities. The second phase comes mainly from working out the bad assets. They face the problem as the write-offs far exceed the equity and they can not raise fresh capital from the market as their share price falls to a meaningless level. The Long-term Credit Bank of Japan, Nippon Credit Bank and Hokkaido Takushoku Bank all failed due to the write offs coming from loans to failing or failed companies. At this stage, it is important for the government to inject fresh capital to let the banks revive and return to their normal operation. In doing so, the Government could end up owning a bank directly or through debt-equity-swap.
The third phase is characterized by the massive failures of operating companies. This is because survived financial institutions are under severe surveillance of the Government and they can not easily extend loans to traditional customers, or corporations. Japan has lost hundreds of companies , such as Daiei, the largest retailer in Japan, in Phase 3. So, what Mr.Geithner talks about, i.e. Japanâ€™s failure to address the right issues at the right time, is absolutely correct. What I am not sure is if the Americans are addressing the right issues with the right priorities and sequence, and how long it will take to get back to â€œbusiness as usualâ€. It has taken Japan 15 years.