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Sovereign Default

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Sovereign Default
Korean 국가부도의 날
Directed by Choi Kook-hee
Produced by Lee Yoo-jin
Written by Eom Seong-min
Starring Kim Hye-su
Yoo Ah-in
Jo Woo-jin
Vincent Cassel
Music by Kim Tae-seong
Zip Cinema
Distributed by CJ Entertainment
Country South Korea
Language Korean

Sovereign Default (Hangul국가부도의 날; RRGukga-budo-eui Nal; lit. National Bankruptcy Day) is an upcoming South Korean drama film directed by Choi Kook-hee.

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This is a film about the power of central banks. Central Banks have the power to create economic, political and social change. This is how they do it… Pearl Harbor - 7th December 1941 A film based on a book by Professor Richard Werner Long live the imperial army. Princes of the Yen Central Banks and the Transformation of the Economy I pledge allegiance to the flag of the United States of America. The atom bomb. The American Occupation LOUDSPEAKER: We will arrive at Yokohama at 09:30 hours, debarkation priority will be in accordance with the debarkation schedule. General Douglas MacArthur arrived at Atsugi Naval Aerodrome, near Yokohama, on August 30, 1945. As he emerged from his aircraft, he paused at the top of the steps, stuck one hand in his hip pockets, tightened his jaws around his corncob pipe, and surveyed the conquered lands. This pose was repeated several times from different angles, so that all the press photographers could get a decent shot. Democracy was to be instilled in the Japanese people, as though they had never heard of it. NEWS: Our problem’s in the brain inside of the Japanese head. These brains like our brains can do good things, or bad things, all depending on the kind of ideas that are put inside. Kabuki plays featuring loyal samurai were banned or heavily censored, as were books and films about the bombings of Hiroshima and Nagasaki. Satirical cartoons of MacArthur and mention of occupation censorship were strictly forbidden. WAR CRIMES TRIBUNAL: The commission finds you guilty as charged and sentences you to death by hanging. NEWS: Yamashita thanked the commission for the fairness of his trial. Prime Minister at the time of the war in the Pacific, General Tojo, remarked during his trial, “none of those Japanese, would dare act against the Emperor’s will.” The cross-examination was immediately cut short, and a week later Tojo dutifully stated that the Emperor had always loved and wanted peace. NEWS: General Hideki Tojo, who assumed official responsibility for the conduct of the war and did everything possible to exonerate his emperor. MacArthur would later remark to the U.S Senate, that in terms of modern civilization the Japanese were like a 12-year-old boy. You are interested in the unknown, the mysterious, the unexplainable, that is why you are here. When the war was over bank’s loan books had deteriorated. The assets the banks held were mainly war bonds and loans to destroyed industries. As such the whole banking sector was virtually bankrupt. This problem was easily solved by the Bank of Japan. All it had to do, was buy the banking sector’s bad papers with newly created reserves, giving them good money for assets, which were often worthless. The first two post war central bank governors were nominated by the US occupation. Eikichi Araki was appointed the first post-war governor of the Bank of Japan. But soon after taking up this post, he was indicted by war crimes prosecutors and had to resign. Then in 1951, after a general amnesty on suspected war criminals filling public offices, he was made ambassador to the United States. On returning from his post as ambassador in 1954, Araki was again made governor of the central bank. After the 1951 amnesty for war criminals, much of the Japanese wartime bureaucracy was returned to their wartime positions. This included wartime politicians and most home ministry bureaucrats who had been in charge of the thought police, a number of whom moved to the education ministry. US ARMY: Japan is the key to the fate of the Far-East, once again for the second time in the march of modern history, those words have urgent reality. In order to avert the kind of rural unrest that was helping the communists in China, the Americans initiated the redistribution of land from big landowners to their tenants. The capitalist elite in Japan, known as the Zaibatsu, were purged as supporters of a criminal war and prohibited from further business activity. The fascist policies of the 30s that the reform fascist bureaucrats could not implement during the war, the US occupation managed to complete, like the land reform and the zaibatsu policy. Yes it’s a very funny encounter of Japanese wartime fascists and American new dealers. The Post-Occupation Politics NEWS: The Diet, home of Japan’s Senate and House of Representatives. NEWS: In Japan, fanatic students and leftist groups rioted for days on end seeking to block the mutual defense treaty with America. The socialist deputies staged a riot in the diet itself. The police in restoring order, also evicted the socialists. NEWS: The speaker was carried to the platform and called to order the session that approved the treaty. In 1957, the former Class A war crimes suspect, Kishi Nobusuke, became prime minister of Japan. He had been General Tojo’s minister of commerce and industry during the war, where his responsibilities had ranged from munitions to slave labor. While Hitlers’ war economy minister was in Berlin Spandau prison, Albert Speer, his Japanese wartime colleague was prime minister of the country. Although Kishi became a defender of democracy after the war, before and during the war, he had described himself as a national socialist. With money from crime syndicates, industrial corporations and CIA slush funds, Kishi built the Liberal Democratic Party into a powerful political machine. In Japan, many of the most important post-war economic and political leaders came from an elite group of wartime bureaucrats, the very same people who had pushed Japan into the war. The Liberal Democratic Party stayed in power for almost 40 years. NEWS: Welcome home in Japanese to these American soldiers. After a tour of duty in Korea they are returning to their base in Japan, where once a short time before they were stationed as occupation troops. And how do they return? How are they received by the people whose land they occupy? Not as overlords, not as antagonists, not as men who are distrusted and feared and resented, but as friends. The War Economy System In Tokyo's Central Chiyoda Ward, the Ministry of Finance had its headquarters. From here, the ministry controlled most aspects of economic life in Japan. The Ministry of Finance was the most powerful ministry and the Bank of Japan had to report to the Ministry of Finance. Ministry of Finance officials elicited deep and hushed exclamations of awe and respect and former ministry bureaucrats obtained influential posts as heads of public and private institutions. But in one area the ministry did not have actual control, and that was the quantity of credit creation and its allocation, which was decided by the Japanese Central Bank: the Bank of Japan. They told the Ministry of Finance and the public and the journalists; “we run monetary policy through interest rates.” And they let the Ministry of Finance reign in their interest rate policies, but the rule was done through, not interest rates, which is the price of money, it was done through the quantity of money. Window Guidance: A process by which a central bank imposes credit growth and allocation quotas on commercial banks. It worked this way, it’s called window guidance. The Bank of Japan just told the banks how much they will have to lend in the coming quarter and who, which sector of the economy to lend to. it's credit allocation, credit control. The Bank of Japan gave quarterly instructions to individual banks, on the value of loans and which industrial sectors they should be allocated to. All loans were broken down in sectors and sub-sectors, and large-scale borrowers had to be listed by name. The Bank of Japan could decide which projects should be encouraged and which should be discouraged, by dictating to whom and for what banks could issue loans. This was the war economy system adapted to the production of consumer goods. NEWS: The 95 million people of Japan now enjoy a national income second only to the United States and the more prosperous nations of Western Europe. It’s not a good system for capitalists, But for the population it created a lot of wealth, very even income and wealth distribution, very high growth, and very rapidly raised quality of life and standards of living. In 1959 alone, the economy expanded by 17%. But a result of the war economy system was that entire industrial sectors would compete not for profit, but for market share. Companies would fight until bankruptcy to gain market share. This phenomenon was soon recognized and called “excess competition”. The solution was the creation of explicit or implicit cartels. In the banking sector, window guidance acted as the cartel control mechanism, because the Bank of Japan could dictate the number and value of loans that banks issued. As a result bank rankings never changed during the post war era, except after mergers. According to one banker, “if it were not for window guidance, we would compete until hara-kiri.” The War Economy and International Trade NEWS: The US current account deficit surges to its highest level in 9 years. The size of the increase took many economists by surprise. While cartels controlled competition within Japan, there were no such limits when it came to international markets. Japanese corporations soon became dominant in many markets in the world. In America, formal congressional hearings were held under the title “Japanese productivity–lessons for America.” Leading economic theories indicate that only free markets can lead to success. But Japan rose within decades to become the second largest economy in the world without relying only on the “invisible hand” of free markets. Japan’s postwar economy was a fully mobilized war economy, with production shifted from weapons to consumer goods. “It is better for the Bank of Japan not to attract attention and remain as quiet as the forest of a rural shrine.” (Hisato Ichimada, 18th Governor of the Bank of Japan) Since the Bank of Japan presented itself as a champion of free markets, window guidance was an embarrassment. Official publications either failed to mention it or downplayed its role by calling the credit controls “voluntary”. Whenever the Ministry of Finance would enquire about the Bank of Japan’s credit creation and allocation policy, Bank of Japan staff would engage in complex discussions full of technical jargon to make the process appear impenetrable to non-experts. In November 1965, the first batch of Japanese government bonds came onto the market. From now on, when politicians wanted to spend more, they would no longer put pressure on the Bank of Japan, but instead exert it on the Ministry of Finance. So the ministry would ultimately preside over an ever-increasing national debt mountain. Central Bankers call for reform The 1980s was an era of financial deregulation in the industrialized world. Most industrialized countries lifted their restrictions on the movement of capital. In Japan, Tadashi Sasaki, a former governor of the Bank of Japan called for a five-year plan for the transformation and liberalization of the Japanese economy. Then, in 1986, the "Advisory Group on Economic Restructuring" headed by the former Bank of Japan governor, Haruo Maekawa, proposed a ten year economic reform plan designed to make the living standards of Japanese more comparable to those enjoyed in the West. The proposal stated that: "the time has now come for Japan to make a historical transformation in its traditional policies on economic management and the nation’s lifestyle. There can be no further development for Japan without this transformation." The report read like a wish list by US trade negotiators. It started with calls for administrative reform and the abolition of bureaucratic powers. The goal was the transformation of the entire body politic, the abolition of the war economy system, and the introduction of a US style free-market economy. Those members of the advisory group who uttered dissent, were relieved of their duties. Reports in the press were highly critical. Observers recognized the radical nature of the plan. It seemed far too ambitious. It was calling for a wholesale revolution of all parts of the Japanese economic, political, and social system. Although the report was clear about what was wanted, it was embarrassingly silent about how these goals would be achieved. The only clue hidden in the report was, “in the implementation of these recommendations, fiscal and monetary policy have a significant part to play.” The Bank of Japan has always been on the record that this Japanese system should be scrapped, and US style capitalism should be introduced. Whether you agree with that or not is an entirely separate question. Now the next question is, how do you do that? The Ministry of Finance has been legally in control for most of the post-war era. We have entrenched bureaucratic structures, politicians, and all these cartels and so on. That was the old system. Well history teaches a system only changes fundamentally if there is a crisis. The commission proposed that monetary policy should be used to promote a historic crisis, sufficiently large to overcome the vested interests of the Ministry of Finance, politicians and corporate Japan. Every system has groups that benefit from it and hence have no desire to change it. There is probably no country in the world that has changed its economic, social, and political system in a significant way without a crisis. It is the crisis that convinces citizens and interest groups of the need for change. How can you achieve this? Well you need a crisis, and the best way to create it, is to have a bubble, because that is how nobody stops you. How to create a Bubble The Bank of Japan began to significantly increase window guidance loan quotas. Average yearly loan growth quotas were close to 15% in the late 1980’s. One city banker would later remark: "during the bubble, we wanted a certain amount of loan increases, but the Bank of Japan wanted us to use more. Young people in their 20s and 30s on modest salaries were able to buy second and third homes. The credit boom caused not only a boom in real estate, but also in the stock market. Between 1985 and 1989, stocks rose 240% and land prices 245%. By the end of the 80’s, the value of the garden surrounding the Imperial Palace in central Tokyo was worth as much as the entire state of California. Although Japan is only 1/26th of the size of the United States, its land was valued at four times of that of the United States. The market value of a single one of Tokyo’s 23 districts, the Central Chiyoda Ward, exceeded the value of the whole of Canada. Economists, who are trained to believe in market outcomes, tried to justify the high land prices. Some thought land scarcity was the reason. Shiny new corporate headquarters rose in Tokyo’s posh business districts. The labor market boomed so much that there was a genuine fear of a serious labor shortage. Companies started to invite final year university students on expensive trips to holiday resorts to entice them to sign up. The politicians loved it, the Ministry of Finance loved it, tax revenues were going up. The companies loved it. Every day was like a festival, we girls were taken out, and everything was always paid for by guys and bosses. No-one used public transport to get home, we always got a taxi. With asset and stock prices rising inexorably, even traditional manufacturers could not resist the temptation to try their hand at playing the markets. Soon they expanded their finance and treasury divisions to handle the speculation themselves. These company hedge funds, known as Zai Tech, used borrowed money to engage in property and share speculation. The frenzy reached such proportions that many leading manufacturers, such as the carmaker Nissan, made more money through speculative investments than through manufacturing cars. Literally thousands of articles were written on the new Japanese miracle economy. A common explanation by economists was that high and rising productivity explained the impressive performance of Japan’s economy. Books on Japanese management techniques became international bestsellers. Western businessmen read 17th-century tracts on samurai strategies. In reality, Japan’s stellar performance in the 1980s had little to do with management techniques. Instead of being used to limit and direct credit, window guidance was used to create a giant bubble. I conducted research interviewing Bank of Japan officers and bankers, both sides, on tape. The result was, the Bank of Japan did continue its informal guidance, in fact it was the Bank of Japan that forced the banks to increase their lending so much. The Bank of Japan knew that the only way for banks to fulfill their loan quotas was for them to expand non-productive lending. In the words of one Banker: "if there is no demand for credit from low-risk borrowers and we want to use up the quota, the risk gets worse." Another banker is quoted as saying that "a side effect of the window guidance rule of loan increases was that banks increased lending even when there was no loan demand." Money Creation and the Bubble Like all bubbles, the Japanese bubble was simply fuelled by the rapid creation of new money by the banking system. Between 1986 and 1989, Toshihiko Fukui was the head of the Banking Department at the Bank of Japan, this was the department that was responsible for the window guidance quotas. When Fukui was asked by a journalist, “borrowing is expanding fast, don’t you have any intention of closing the tap on bank loans?” he replied, “because the consistent policy of monetary easing continues, quantity control of bank loans would imply a self-contradiction. Therefore we do not intend to implement quantitative tightening. With structural adjustment of the economy going on for quite a long period, the international imbalances are being addressed. The monetary policy supports this, thus we have the responsibility to continue the monetary easing policy as long as possible. Therefore it is natural for bank loans to expand.” Why were the banks lending so much? Because they were forced to do so by the orders of the Bank of Japan. Normally, banks choose clients from among a large number of loan applicants, turning down a significant percentage. But from 1987 onwards, the tables had turned. It was the bankers who were aggressively pursuing potential customers. Anecdotes abound about how banks were soliciting loans at bargain interest rates, pursuing clients like street peddlers. The banks were encouraging people to borrow money. For example when a newly wed couple wanted to buy a house, banks would offer them double the amount they asked for. Bankers made increasingly exaggerated assessments of land value, so that the actual ratio of land value to loan often jumped to 300% or more. To the public this was a strange phenomenon. People soon dubbed it "excess money". Only economists, analysts, and those working in the financial markets or for real estate firms knew better. They dismissed such simplistic analysis. Land prices were going up due to far more complicated reasons than just excess money, they claimed. Ordinary people simply did not understand the intricacies of advanced financial technology. International Capital Flows When a country creates too much money, some of that money spills out abroad in the form of investments. In the 1980s Japanese capital flows multiplied from a net inflow of more than $2 billion in 1980 to an outflow of $132 billion in 1986. Assets, including art objects and other valuables all over the world became targets for Japanese buyers. There were high-profile purchases such as the Rockefeller Centre, Columbia Pictures and Pebble Beach Golf Course. Japanese money bought a staggering 75% of all United States treasury bonds auctioned off in 1986. But it is not easy for a country to just print money and then go on a shopping spree around the world. Japan was able to do this because the markets did not devalue its currency. The value of individual currencies is set by currency dealers. If the traditional indicators that the currency dealers watch do not pick up the excess money creation in the country concerned, then creating large amounts of money and trying to exchange it for foreign currency, can work. Japan had pulled off the same trick that the United States had used in the 1950s and 1960s, when US banks excessively created dollars. Corporate America used this hot money to buy up European corporations. While the United States had the cover of the dollar gold standard, Japan’s cover was a significant trade surplus. Non-GDP based loan: A loan, which is not used for the production of goods or services. An early warning indicator of the buildup of systemic risk in the banking system is the ratio of loans for non-GDP-based transactions to total loans. This ratio increases significantly in most countries that are subsequently struck by a banking crisis. It was this same process that fueled the mortgage lending and house price booms in the United States and the United Kingdom in the 1980s and the 2000s. The same process also created the golden twenties: in the 1920s, United States banks lent with stocks as collateral. The principle remains the same. As each bank took the stock price as a given, it created new money. With more money in the stock market, stock prices had to rise. Each bank thought it was safe accepting a certain percentage of the value of the stock as collateral, but the actions of all banks together, drove up the overall market. In Japan, total private sector land wealth rose from ¥14.2 trillion in 1969 to 2000 trillion yen in 1989. At his first press conference as the 26th governor of the Bank of Japan, in 1989, Yasushi Mieno said that, “since the previous policy of monetary easing had caused the land price rise problem, real estate related lending would now be restricted.” He looked around, looked at the bubble, asset prices rising, the gap between rich and poor getting bigger, let's stop it. His name was mister Mieno, and he was a hero in the press, because he fought against this silly monetary policy. But he was deputy governor during the bubble era, and he was in charge of creating the bubble. The Crash All of a sudden land and asset prices stopped rising. In 1990 alone, the stock market dropped by 32%. Then in July 1991, window guidance was abolished. This took the window guidance officers at the Bank of Japan themselves by surprise. Bankers were left almost helpless. They complained that they did not know how to make their lending plans anymore. In the past when a certain branch said they would like to lend more, they would respond that the window guidance quota had been used up. Now they couldn’t do that anymore. As banks began to realize that the majority of the ¥99 trillion in bubble loans were likely to turn sour, they became so fearful that they not only stopped lending to speculators, but also restricted loans to everyone else. NEWS: Well it’s a bleak Christmas ahead for Japan, the stock market on Monday sinking to its lowest close in over two years. Last week's collapse of one of Japan’s biggest food traders was the 9th time this year that a listed company went under. More than 5 million Japanese lost their jobs and did not find employment elsewhere. Suicide became the leading cause of death for men between the ages of 20 and 44. The papers ran stories of people hanging themselves or going missing on an almost daily basis. Between 1990 and 2003, 212,000 companies went bankrupt. In the same period the stock market dropped by 80%. Land prices in the major cities fell by up to 84%. Some economists seemed relieved. The downturn was evidence that Japan’s economic system was not so successful after all. Meanwhile, the Governor of the Bank of Japan, Yasushi Mieno, said that: “thanks to this recession everyone is becoming conscious of the need to implement economic transformation,” The Failed Bailout The Ministry of Finance, believing that interest rates were the main policy tool, put pressure on the Bank of Japan to lower interest rates, until the official rate reached 0.1%. Most economists predicted an economic recovery. But despite frequent assertions in the financial press and by central banks that lower interest rates will stimulate growth and higher interest rates will slow growth, there is no empirical evidence for this relationship. NEWS: Japanese and American businessmen are meeting here with a plea from Japan’s companies for a lower yen. Only 6% of Japanese exporters can make profits with the dollar at less than a ¥100. On average they need the American currency to rise above ¥117 to break even. The Ministry of Finance asked the Bank of Japan to sell large amounts of yen and buy US dollars, so that the exchange rate of the yen would fall and exports would pick up. The two of them, the Ministry of Finance (MOF) and the Bank of Japan (BOJ), they just don’t get along well. And what has been happening again this month is that the Bank of Japan has been sterilizing its own intervention, to be precise, the intervention ordered by the Ministry of Finance. The Ministry of Finance tells the Bank of Japan to go out and buy roughly 20 billion worth of US treasuries. But, the Bank of Japan is sterilizing this, which means it is basically taking the money from the economy to fund this purchase. Most researchers agree, sterilized forex intervention doesn’t work. The BOJ is again sterilizing, that’s why it doesn’t work, that’s why the yen has remained strong. A central bank can withdraw money from the economy by selling its assets. Just as it can inject money into the economy by buying assets. When central banks buy and sell assets, they increase or decrease the amount of money circulating in the economy. Officials at the Bank of Japan ignored this, and instead claimed that, “this structural transformation or reform may produce deflationary forces in the short run, but will generate a much more efficient economy after a while.” Independent observers suggested that domestic demand had to be boosted by government spending, and then loan demand would also rise. For a decade, the government followed their advice, boosting government debt to historic levels. Between 1992 and 2002, 10 stimulation packages worth ¥146 trillion were issued. NEWS: Mr Richard Werner is chief economist at Jardine Fleming Securities in Tokyo. He joins us now to share his views on where the Japanese economy is heading. The government was spending with the right hand, putting money into the economy, but the fundraising was done through the bond market, and therefore it took the same money out of the economy with the left hand. There was no increase in total purchasing power and that’s why the government spending couldn’t have an impact. By 2011 Japan’s government debt would reach 230% of GDP, the highest in the world. The Ministry of Finance was running out of options. Observers began to blame the ministry for the recession, and started to listen to the voices that argued that the recession was due to Japan’s economic system. But how difficult would it have been to solve the problems of bad debt in the banking sector, and deflation? It turns out that this would not have been so difficult after all. The financial system always looks like Catch 22, there’s no loan growth, so there’s no economic growth, so there’s no loan growth, so there’s no economic growth. Well, there is one thing that can break through this circular argument, that’s the central bank. The job of the central bank in this situation is to print money. The Power of Central Banks What we need now is more radical measures, and there are some painful ones, but there are also painless ones. The central bank could for example just buy all bad debts at face value. Japan would have the strongest banks in the world. To bail out the banking sector a central bank can buy up the banks bad financial assets with newly created money, giving them face value for assets, which are often worth significantly less. This is what the Bank of Japan did after the war. Alternatively, money could be transferred to the banks by helping them make sizeable profits. One way this can be achieved is for the central bank to corner a market – in effect creating a mini bubble in a certain market in which banks invest heavily, providing large profits for them. This turns out to be a relatively common technique by central banks to help their banking systems. Other proposals include, measures to introduce zero risk borrowers to banks or introducing accounting changes that help their balance sheets. In Japan, the authorities and the Bank of Japan argued, as did the Western powers almost two decades later, that the taxpayer should foot the bill. In March last year, the government injected a large amount of money into some 15 major Japanese financial institutions. And we were one of them. That helped us write off bad debts, and also to beef up our capital base so that we would be prepared to lend. Tax money has been used to recapitalize banks. However, there is no evidence that taxpayers have been responsible for the banks problems, therefore, such policies have likely created a moral hazard. The money supply is determined by the net increase in money creation by banks and the central bank. If moral hazard dictates that the banking sector should not be bailed out, deflation and recession can still be avoided by the central bank. To do this, the central bank can increase the money supply. A central bank can increase the amount of money in an economy at any time, without limit, by simply buying assets from the private sector and paying with newly created credit. The Bank of Japan could for instance have bought real estate and converted it into public parks. And there is an opportunity here to solve three problems in one stroke. The economy needs money creation, the banks need to get rid of their bad debt and the real estate sector needs some transactions. What you can do is just have the central bank print money, buy the land from the banks, turn it into parks, and you solve another problem, quality of life in Japan. Even if the Bank of Japan would have later sold these parks at a fraction of the cost, it would still have made money, because it costs a central bank nothing to create the money in the first place. Another option for injecting money into the economy is quantitative easing. Despite having all these options available, the Bank of Japan at every stage refused to implement policies that would have resolved the crises. When I was at the Bank of Japan in 1992-1993, as a visiting researcher, I was convinced that this recession was going to get really bad. So I would ask any Bank of Japan person who would talk to me, why aren’t you printing more money. I met one individual who was quite open about this and he said: “Richard, sure we could have printed more money, we could have created a recovery, but then nothing would have changed, Japan's economic structure would not have changed.” Now at that time I still wasn’t ready to believe that the Bank of Japan was prolonging the recession in order to get structural changes that just seemed a bit too wild. Finance Minister Masajuro Shiokawa has turned to the Bank of Japan asking it to help stop deflation, or fight deflation at least. The Bank of Japan consistently defied calls by the government, finance minister and prime minister to create more money to stimulate the economy and end the long recession. At times the Bank of Japan even actively reduced the amount of money circulating in the economy, which worsened the recession. The Bank of Japan’s arguments always came to the same conclusion, namely, that the blame lay with Japan’s economic structure. Central bank staff even argued that significant monetary easing “could cause harm” by inducing “a further delay in the progress of structural adjustment”. The early postwar Japanese leaders knew that they were running a war economy, but they chose not to talk for political reasons. The cold war propaganda message was that post-war Japan had adopted a US style political and economic system. Unwilling to tell the truth, the early post-war leaders, took their intimate knowledge about the origins of Japan’s miracle economy with them to their grave. A generation of bureaucrats and politicians reigned in the 1980s and 1990s, who did not understand the true character and purpose of their own country’s economy. A whole generation of Japan’s economists had been sent to the United States to receive Ph.Ds and MBAs in US style economics. Since neoclassical economics assumes that there is only one type of economic system, namely, unmitigated free markets, where shareholders and central bankers rule supreme, many Japanese economists quickly came to regurgitate the arguments of US economists. Dismantling The Ministry Of Finance NEWS: The US and Japan closed two days of insurance talks on Tuesday. Primary sector deregulation is needed to overcome the entrenched interests of large insurance companies, life and non-life, and the Ministry of Finance bureaucracy. They need to reach an agreement before December the 15th, after that date the US has threatened to impose trade sanctions. A key move analysts are expecting is the securitization of real estate. For more we are talking to Richard Werner. To have meaningful securitization, we need deregulation, and that’s already the answer to your question, to get deregulation you have to reduce the power of the Ministry of Finance, and obviously the ministry was resisting that. In the 1980s, persons who could introduce themselves with a business card from the renowned finance ministry, elicited deep and hushed exclamations of awe and respect. But by the mid 1990's attitudes had changed, there now seemed little doubt to most observers, that the Ministry of Finance had caused the recession. Frequent demonstrations were held outside the ministry’s doors, by citizens disgusted by the bureaucrat’s actions. In early 1998 public prosecutors for the first time raided the most powerful of Japan’s ministries. Both banks and their regulators were heavily criticized for their actions. Scandals highlighted some of the informal links that existed between Ministry of Finance officials and bankers. Many bank staff, and even some ministry officials, were arrested and imprisoned, and several committed suicide. As central banker Masaaki Shirakawa had explained: “it is not easy to change the institutional framework and promote structural reform since it necessarily involves the vested interests of all the related individual economic agents.” While Yutaka Yamaguchi, a deputy governor of the Bank of Japan, had said that, "the Bank of Japan had faced the big dilemma that monetary easing would produce the mitigation of immediate risks, which in turn would result in a delaying of adopting ultimate solutions." From the mid 1990’s onwards the Government began to dismantle much of the power structure of the Ministry of Finance. The Bank of Japan on the other hand, saw its influence grow significantly. NEWS: You have written just recently, “there is no doubt in your mind, the Bank of Japan will be cut loose from the Ministry of Finance and become independent, putting it on a footing with other central banks.” Why are you so sure? The Ministry of Finance which had been controlling legally at least the Bank of Japan, has lost all credibility. The Ministry of Finance is being blamed for the creation of the bubble, for the long recession and for many other problems, which we’ve had recently in Japan. Whereas the Bank of Japan has been out of the spotlight of public criticism and it’s using that now to say, well, the MOF has been bad we need independence now. Richard, thanks very much. I have been speaking to Richard Werner chief economist at Jardine Fleming Securities in Tokyo. Soon after his retirement from the position of governor of the Bank of Japan in 1994, Mieno embarked on a campaign giving speeches to various associations and interest groups. He lobbied for a change in the Bank of Japan law. His line of argument was to subtly suggest that the Ministry of Finance had pushed the Bank of Japan into the wrong policies. To avoid such problems in the future, the Bank of Japan needed to be given full legal independence. According to Mieno, making central banks independent reflected the human wisdom that had been nurtured by history. In 1998 monetary policy was put into the hands of the newly independent Bank of Japan. So you’re saying that politicians as well as economists should be putting more pressure on the Bank of Japan to create more money. A lot of critics are going to say that that is intervening in the central banks independence. What do you make of that? That’s exactly right, that is intervening in the central banks independence, and that’s exactly what we need. The Transformation Of The Political System The numerous scandals that followed the bursting of the bubble also brought down the 1955 system of one-party rule by the Liberal Democratic Party. In the old system, politicians did not compete by proposing different policies. Policy was made by the bureaucrats, and politicians merely focused on appeasing local constituencies with public works projects. In October 1997, for the first time in post-war history, all policy initiatives to stimulate the economy originated from politicians, not bureaucrats. Then in early 2001 a new type of politician was swept to power. NEWS: Japanese Government bonds staged their biggest rally this month as Junichiro Koizumi emerged as the hot favorite to become the country’s next prime minister. Junichiro Koizumi became prime minister. In terms of his popularity and his policies he is often compared to Margaret Thatcher and Ronald Reagan. His message was simple, no recovery without structural reform. At the Geneva summit in July 2001 he said: “Some say recovery comes first, without reforms, but if the economy recovers, the will to reform will disappear. Therefore, after the elections I will continue with the plan of no growth without structural reform.” During 2001 the message of no economic growth without structural reform had been broadcast on an almost daily basis on the nation's TV screens. NEWS: The countries at the G7 summit are putting pressure on Japan to implement structural reform. In Korea there were riots, but then the government decided to break up large conglomerates. Now their economy is recovering. Now is the time for Japan to implement structural reform. Now everyone believes we need structural changes, we need to scrap Japanese style capitalism to get a recovery, why? It seems we tried all the policies, nothing worked, so the Japanese style economic system must be to blame, so we better get rid of it. The Transformation Of The Economy Japan was shifting its economic system to a US style market economy, and that also meant that the center of the economy was being moved from banks to stock markets. To entice depositors to pull their money out of banks and into the risky stock market, reformers withdrew the guarantee on all bank deposits, while creating tax incentives for stock Investments. As US style shareholder capitalism spread unemployment rose significantly, income and wealth disparities rose as did suicides and incidents of violent crime. Then, in 2002 the Bank of Japan strengthened its efforts to worsen bank balance sheets and force banks to foreclose on their borrowers. Until then, Hakuo Yanagisawa, minister for financial services, had resisted the Bank of Japan inspired proposal to inject tax money into banks, effectively nationalizing them, taking over their management and using this power to call in loans from companies, thus triggering many bankruptcies of large firms. Mr. Yanagisawa was duly sacked by the prime minister and replaced with Heizo Takenaka, Takenaka was a supporter of the Bank of Japan’s plan to increase foreclosures of borrowers. Minister Takenaka was trying to implement a policy to dramatically weaken the balance sheets of the banks, in order to allow him to nationalize them. Takenaka appointed a task force to oversee the banking policies, which included two former Bank of Japan staff. One of them, Takeshi Kimura, immediately demanded that accounting changes be implemented which would worsen bank balance sheets and render nationalization unavoidable. Takuro Morinaga, a well-known economist in Tokyo, argued forcefully that the Bank of Japan inspired proposal by Takenaka would not have many indigenous beneficiaries, but instead would mainly benefit US vulture funds specializing in the purchase of distressed assets. These vulture funds had faced the difficulty that despite over 200,000 bankruptcies, few firms sufficiently large for the vulture funds to be interested were bankrupted. When Kimura’s and Fukui’s support for the bankruptcy plan was voiced, the former operated a private company that advised on the securitization of distressed assets and the latter was an adviser of the Wall Street investment firm Goldman Sachs one of the largest operators of vulture funds in the world. Mister Fukui, also his mentor Mister Mieno, and his mentor Mister Maekawa, and you’ve guessed it, these are some of the Princes of the Yen that the book is all about. They have said on the record in the 80s and the 90s, what is the goal of monetary policy? It is to change the economic structure. Now, how do you do that? Well, you need a crisis. And that’s really what they have done. Richard, we’re out of time I have to cut you off. WHISTLEBLOWER: I work for one of the big city banks. I used to be in charge of liasing with the bank of Japan. During the bubble era we were told every three months by the Bank of Japan, how much loans had to be increased by. The Bank of Japan window guidance allocation was an order. The cause of the bubble was the window guidance, and it was done on the order of the Bank of Japan. The department responsible for the window guidance quotas at the Bank of Japan, was called the Banking Department. And who was in charge of this? The man at the head of this Banking Department during the bubble from 86-89 was Toshihiko Fukui. Mister Fukui, the current governor of the Bank of Japan, he’s the man who created the bubble. When Fukui had become governor of the Bank of Japan, he would say: “while destroying the high-growth model, I am building a model that suits the new era.” They have succeeded on all counts. If you look at the list of their goals, they’ve reached all those goals: Destroy the Ministry of Finance, break it up, get an independent supervisory agency, reach independence for the Bank of Japan itself by changing the Bank of Japan law and engineer deep structural changes in the economy, by shifting from manufacturing to services, opening up, deregulating, liberalizing, privatizing, the whole lot. In the 1920s, Japan’s economy in many ways resembled today’s U.S economy – with fierce competition, aggressive hiring and firing, takeover battles between large corporations, few bureaucratic controls, strong shareholders that demanded high dividends, and corporate funding from the markets, not banks. Yet throughout the postwar era, Japan’s economy had been the opposite: highly regulated, with cartels limiting competition, bank financing and cross shareholdings reducing shareholder power, no takeovers, and a frozen labor market with lifetime employment and seniority pay. It was claimed that to end the recession and improve performance, Japan must shift from welfare capitalism back to shareholder capitalism. Yet it remains unclear why a country that had run a consistent and significant balance of trade surplus would need to change its economic system to become more competitive. The Southeast Asian Crisis Japan was not the only high-performance economy in Asia that in the 1990s found itself in the deepest recession since the great depression. In 1997, the currencies of the Southeast Asian Tiger Economies could not maintain a fixed exchange rate with the US dollar. They collapsed by between 60 and 80% within a year. The causes for this crash went as far back as 1993. In that year, the Asian Tiger Economies, South Korea, Thailand and Indonesia implemented a policy of aggressive deregulation of the capital account and the establishment of international banking facilities which enabled the corporate and banking sectors to borrow liberally from abroad –the first time in the post-war era that borrowers could do so. In reality, there was no need for the Asian Tiger Economies to borrow money from abroad. All the money necessary for domestic investment could be created at home. Indeed, the pressure to liberalize capital flows came from outside. Since the early 1990s, the IMF, the World Trade Organization, and the US Treasury had been lobbying these countries, to allow domestic firms to borrow from abroad. They argued that neoclassical economics had proven that free markets and free capital movement increased economic growth. Once the capital accounts had been deregulated, the central banks set about creating irresistible incentives for domestic firms to borrow from abroad. By making it more expensive to borrow in their own domestic currencies than it was to borrow in US dollars. The domestic local interest rates were higher than the US dollar interest rate, and the exchange rate was virtually fixed. It was the government and the central bank that said: "we will maintain the exchange rate." That’s right, central banks of Thailand and other East-Asian countries resisted exchange rate adjustment and they tried to send a signal that they would protect the exchange rate. The central banks emphasized in their public statements that they would maintain fixed exchange rates with the US dollar, so that borrowers did not have to worry about paying back more in their domestic currencies than they had originally borrowed. When I was in Thailand, I went straight to the Bank of Thailand and asked them: “were there any informal credit guidance schemes?” And they were surprised that I asked this question. Because of my study in Japan, I thought perhaps there was something similar. And they told me, it was a young staff who perhaps wasn’t aware of the politics involved, he said: “yes, yes, we have this credit planning scheme.” Banks were ordered to increase lending. But they were faced with less loan demand from the productive sectors of the economy, because these firms had been given incentives to borrow from abroad instead. They therefore had to resort to increasing their lending to higher risk borrowers. Imports began to shrink, because the central banks had agreed to peg their currencies to the US dollar. The economies became less competitive, but their current account balance was maintained due to the foreign issued loans, which count as exports in the balance of payments statistics. When speculators began to sell the Thai baht, the Korean won, and the Indonesian rupee, the respective central banks responded with futile attempts to maintain the peg until they had squandered virtually all of their foreign exchange reserves. This gave foreign lenders ample opportunity to withdraw their money at the overvalued exchange rates. The central banks knew that if the countries ran out of foreign exchange reserves, they would have to call in the IMF to avoid default. And once the IMF came in, the central banks knew what this Washington-based institution would demand –for its demands in such cases have been the same for the previous three decades: The central banks would be made independent. On the 16th of July the Thai finance minister took a plane to Tokyo to ask Japan for a bailout. At the time Japan had US$213 billion in foreign exchange reserves –more than the total resources of the IMF. They were willing to help, but Washington stopped Japan’s initiative. Any solution to the emerging Asian crisis had to come from Washington via the IMF. NEWS: After 2 months of speculative attacks, the Thai government floated the baht. The IMF to the rescue The IMF to date has promised almost $120 billion to the embattled economies of Thailand, Indonesia and South Korea. Immediately after arrival in the crisis stricken countries, the IMF teams set up offices inside the central banks, from where they dictated what amounted to terms of surrender. The IMF demanded a string of policies, including curbs on central bank and bank credit creation, major legal changes and sharp rises in interest rates. As interest rates rose, high-risk borrowers began to default on their loans. Burdened with large amounts of bad debts, the banking systems of Thailand, Korea, and Indonesia were virtually bankrupt. Even otherwise healthy firms started to suffer from the widening credit crunch. Corporate bankruptcies soared. Unemployment rose to the highest levels since the 1930s. The role of the fund in coming to the rescue of ailing nations has been fiercely debated. Some have even accused the IMF of making Asia’s economic crisis worse. Even if they have to subvert our economy they will do so just to prove that they are right. The IMF has not been very helpful. The IMF knew well what the consequences of its policies would be. In the Korean case, they even had detailed but undisclosed studies prepared that had calculated just how many Korean companies would go bankrupt if interest rates were to rise by five percentage points. The IMF’s first agreement with Korea demanded a rise of exactly five percentage points in interest rates. The IMF policies are clearly not aimed at creating economic recoveries in the Asian countries. They pursue quite a different agenda, and that is to change the economic, political and social systems in those countries. In fact, the IMF deals prevent the countries concerned, like Korea, Thailand, to reflate. Hmmm, interesting, you are saying it’s making the crises worse and you’re suggesting that the IMF has a hidden agenda. It’s not very hidden this agenda, because the IMF clearly demands that the Asian countries concerned have to change the laws so that foreign interests can buy anything from banks to land. And in fact, the banking systems can only be recapitalized, according to the IMF deals, by using foreign money. Which is not necessary at all, because as long as these countries have central banks, they could just print money and recapitalize the banking systems. You don’t need foreign money for that. So the agenda is clearly to crack open Asia for foreign interests. The IMF demanded that troubled banks would not be bailed out, but instead closed down and sold off cheaply as distressed assets, often to large US investment banks. NEWS: One positive coming out of Thailand is that they will be auctioning off some major assets from 56 finance companies. In your view should eehm, some of the owners of the 56 finance companies be allowed to buy back their assets? In most cases, the IMF dictated letters of intent explicitly stated that the banks had to be sold to foreign investors. And let me emphasize in that respect, these reform programs are the key, the absolute key to restoring financial stability. NEWS: For the first time ever, South Korea closed five banks in a major step towards meeting its IMF mandate. The number of commercial banks has declined, has been reduced as a result of closures, mergers and acquisitions, and foreign strategic investors are now in, which is a remarkable change. In Asia, government organized bailouts to keep ailing financial institutions alive were not allowed. But when a similar crisis struck back home in America a year later, the very same institutions reacted differently. The Bailout of Long Term Capital Management The Connecticut-based hedge fund Long-Term Capital Management, which accepted as clients only high net worth individual investors and institutions, had leveraged its $5 billion in client capital by more than 25 times, borrowing more than $100 billion from the world’s banks. When its losses threatened to undermine the banks that had lent to it, with the possibility of a systemic banking crisis that would endanger the US financial system and economy, the Federal Reserve organized a cartel like bailout by leaning on Wall Street and international banks to contribute funds so that it could avoid default. You’re right, the views from Washington and New York certainly seemed quite flexible, because soon after they told all the Asian countries “no bailouts for financial institutions,” when Long Term Capital Management, a hedge fund in New York almost went bust, suddenly a bailout was organized, contradicting what they had just said to the Asian countries. But they said that no public money was used for LTCM. But the meeting was held famously inside the Federal Reserve. Why would the United States make demands on foreign nations in the name of the free market, when it has no intention of enforcing the same rules within its own borders? The examples of the Japanese and Asian crises illustrate how crises can be engineered to facilitate the redistribution of economic ownership, and to implement legal, structural and political change. Today similar events are at work in the Eurozone area. The European Debt Crisis. Countries within the Euro currency bloc have forfeited their right to a national currency and handed this power to the European Central Bank. NEWS: With me here in the studio is Richard Werner. He is a professor at Southampton University, What’s your advice to the ECB, they’re meeting tomorrow, what would you be telling them? Well, again, they have to focus on the quantity of credit creation more than interest rates. The ECB has a lot to learn from its past mistakes, because I don’t think it really watched credit creation carefully enough. In Spain, Ireland, we had massive credit expansion under the watch of the ECB, interest rates of course are the same in the Eurozone, but the quantity of credit cycle is very different. There’s one interest rate for the whole euro area, but in 2002 the ECB told the Bundesbank to reduce its credit creation by the biggest amount in its history and told the Irish central bank to print money as if there was no tomorrow. What is going to happen? Same interest rate, is it the same growth? No. Recession in Germany, boom in Ireland. From 2004, under the ECB’s watch, bank credit growth in Ireland, Greece, Portugal and Spain increased by over 20% per annum and property prices sky rocketed. When bank credit fell, property prices collapsed, developers went bankrupt, and the banking systems of Ireland, Portugal, Spain and Greece became insolvent. The ECB could have prevented these bubbles, just as it could have ended the ensuing banking and economic crises. But it refused to do so until major political concessions had been made, such as the transfer of fiscal and budgeting powers from each sovereign state to the European Union. In both Spain and Greece youth unemployment has been pushed up to 50%, forcing many youths to seek employment abroad. Greek doctors for whose education Greek taxpayers have paid, now work in Germany. The deliberations of the ECB's decision-making bodies are secret. The mere attempt at influencing the ECB –for instance through democratic debate and discussion– is forbidden according to the Maastricht Treaty. The ECB is an international organization that is above and outside the laws and jurisdictions of any individual nation. Its senior staff carry diplomatic passports and the files and documents inside the European Central Bank cannot be searched or impounded by any police force or public prosecutor. The ECB is well known among economists as one of the world’s most powerful and least transparent central banks, yet its former president Jean-Claude Trichet dealt with this problem by merely asserting that there was no problem: ”the ECB is one of the most transparent central banks in the world and has helped define the state-of-the-art of central banking in this domain,” he claimed. World Economic Forum - Davos, Switzerland. My name is Richard Werner I am an economist... My question is for monsieur Trichet. The question is, where in the Maastricht treaty or ECB statutes does it say that it is the job of the ECB to back structural reform or any other political agenda. I said very, very clearly, and we have always said very, very clearly, that we had no responsibility in this domain. We have a voice, and we say what we think. And perhaps if we can help in explaining from our side to the general people that they would be better off, perhaps it would help Europe embarking in this implementation of structural reforms, which is so important, and there is a consensus on that, the diagnosis again, is ehh ehh ehh a very very very large consensus on this eh, on this point. The European Commission, an unelected group whose aim is to build a United States of Europe with all the trappings of a unified state, has an interest in weakening individual governments and the influence of the democratic parliaments of Europe. It turns out that the evidence for central-bank independence that was relied upon in the Maastricht Treaty derived from a single study that was commissioned by none other than the European Commission itself. Published in 1992 under the name “ one market, one money”, the study purported to demonstrate that central bank independence led to low inflation. James Forder, an Oxford academic, has since demonstrated that this study was manipulated to obtain the desired result. The story we’re being told by the central banks does not add up, and there is evidence that central banks work differently from what they would like us to believe as to how they work. The world over, central banks hold significant, yet little understood powers. Often independent, unaccountable and obscure, central banks operate in the shadows, yet their actions affect us all. Central banks in almost all countries worldwide, and the IMF has helped a lot in achieving this, they have become totally independent and in practice not accountable to any democratic institution. And accountability to parliament is usually minor and in practice meaningless. Whether it is the Bank of Japan, the Federal Reserve, the Bank of England or the European Central Bank, examples of central bank deception abound. In the United States in the 1920s, banks were encouraged to create money and give it to speculators. The resulting depression persuaded the freedom loving Americans that a decentralized federal system without strong national controls, could not work. In the 1990s the Japanese were persuaded that their economic system, which had brought considerable prosperity and equality, needed to be changed into a so-called free market system. And while Japan's transformation was not yet complete the central bankers struck again, with an IMF led raid on the Asian Tiger economies. The present European debt crisis is yet another example of central bank deception. To create a public consensus for the need for structural reform by purposefully creating a recession and then needlessly prolonging it, must constitute an abuse of power. Do citizens really want to be manipulated in such a costly and dishonest manner? The End



Depicts the behind-the-scenes story of the IMF negotiations that took place during the financial crisis in 1997.



The read-through of the script occurred on December 7, 2017.[2] Principal photography began on December 12, 2017.[3]


External links

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