Arnold Kling

Financial Markets and Economic Performance

Arnold Kling, Great Questions of Economics
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Also in the Milken Institute Review, Gavin Buckley says that Japan is wallowing in its banking crisis, rather than fixing it. In theory, its Resolution and Collection Corporation (RCC) should be liquidating the assets of failed institutions.

when the assets are depleted, the RCC would close up shop as the Resolution Trust Corporation did in the United States in 1995. However, neither the RCC's owner--the Japanese Government--nor its staff members wish that to happen.

For its staff the job of collecting income from assets (rather than disposing of them) means job security.

In the same issue, Joseph Stiglitz explains the advantage of a rapid bankruptcy resolution process.

Firms facing bankruptcy are in a state of limbo: it is not clear who really owns them, the current owners or creditors. But without clear owners, there is always a temptation for current management and the old owners to strip assets. the United States, trustees are appointed by the courts to prevent this. But in Asia there were neither the legal frameworks nor the personnel to implement trusteeships.

Finally, in the same publication on a similar topic, Myron Scholes says

We are very much equity-based in the United States, while Europe is mainly bank-based.

European corporations are coddled by their banks...

Well-developed equity markets quickly punish failure and reward success, directing capital to the right investments. That is missing in Europe.

Discussion Question. In the United States, financial scandals and crises create a desire to resolve the issue and move on. Why is this healthier than dragging out the crisis?

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