Can U.S. financial capitalism be fixed?

[FarCenter]

The Yomiuri Shimbun -- http://www.yomiuri.co.jp/dy/business/20090114TDY01302.htm

This following article was compiled based on an interview with Toyoo Gyoten,78, president of the Institute for International Monetary Affairs.


The latest financial crisis, triggered by the bursting of the U.S. housing bubble, differs from past crises in that it occurred while money, manpower and information were flowing freely across borders. Coupled with the widespread adoption of securitization, these factors gave rise to complicated financial mechanisms. As a result, the world economy fell into a trap fashioned by financial capitalism, which in turn caused a bubble to form, and, inevitably, burst. Market economy and financial capitalism models in the United States are based on the premise that efficiency can be boosted if as many regulations as possible are removed.

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The latest crisis represents a failure in the Anglo-Saxon business model, a fact that could potentially work in Japan's advantage. What now troubles the United States most is that its credit market has been rendered moribund due to the spread of financial products that disregarded common sense credibility and trust. Compared with its U.S. counterpart, the Japanese financial industry is in a healthy state, due to the adoption of credit-related activities as a key part of its business model. If Japanese business is still seen to be based on trust and moderation, Japan can market these virtues to the world.

If the latest financial crisis is to be exploited in Japan's favor, three key points should be considered with regard to the future course of capitalism and the world economy. The first is whether there will be any change in the current key currency system under which the U.S. dollar is treated as the key currency. The second point is how to deal with financial capitalism, and the third is whether the United States will be able to revive its economy by correcting excessive consumption.

The greenback likely will maintain its status as the world's key currency, but it is doubtful whether it will continue to play the same leading role it has done in the past. This could potentially destabilize the world monetary system. The United States gradually increased in might from the late 19th century--overtaking the British Empire in the process. With the end of World War II, the United States emerged as a dominant power both in status and substance. The dollar's position as the key currency rose in tandem with Washington's potency. However, the comprehensive power once enjoyed by the United States has dropped considerably from its peak. While the United States has been burdened by Middle East issues--including the war in Iraq--China and India have boosted their positions in the world. As a result of the synergistic effects of these two factors, the greenback's status as the key currency has deteriorated. The dollar once accounted for the vast majority of foreign exchange reserves held by other countries. But this has now changed, and the figure presently stands at about 65 percent. But I do not believe the U.S. dollar will lose its position as the key currency within the next decade or two, as there is no other currency as yet that can take its place.

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The second subject that the United States must tackle is financial capitalism. U.S. President-elect Barack Obama nominated three main players in his economic team--Timothy Geithner as Treasury secretary, Lawrence Summers as director of the National Economic Council, and Paul Volcker as chairman of the Economic Recovery Advisory Board. All three of these men have held public financial posts and attach great weight to the public sector's role in financial matters. Consequently, it seems the U.S. financial system will be managed along this line for some time to come. Departing from the business investment model of borrowing money dozens of times the small amount of seed money through financial leverage, U.S. financial institutions likely will return to the traditional model of collecting and lending deposits while focusing on the domestic market. Needless to say, it is possible the pendulum could swing back the other way in the future.

The third challenge is whether the United States will be able to correct its excessive dependence on consumption with the aim of sustaining its economy. Can the incoming Obama administration realize this goal? This will be the biggest focal point of the 21st century.

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Asian countries increasingly have great expectations of Japan. With their economies damaged by the financial crisis, some fear a shortage of foreign exchange reserves. These countries are strongly calling on Japan to help improve the Asian capital market and look into the possibility of establishing a common currency similar to the euro. During a recent tour of Asian countries, I was often told that Japan has lost its vigor and was not willing to express its views. I hope Japan will not hesitate to take up the leadership mantle in Asian financial affairs.


Gyoten is a former vice finance minister for international affairs and a former chairman of the Bank of Tokyo.