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Save the Fat Cats

October 2, 2008, New York Times, Save the Fat Cats, by Nicholas D. Kristof.

In the early 1990s, when I was a foreign correspondent looking for my next overseas posting with The Times, I sought Japan. At the time, Tokyo was an awe-inspiring economic titan, arguably the most important capital outside the United States.

Then Japanese politicians, acting with the same sublime ineptitude that our own House of Representatives displayed this week, ignored a growing banking crisis and dithered on a bailout. And so I watched from Tokyo as a mighty economy melted like an iceberg in the Caribbean.

Japan’s failure to respond urgently and decisively to its banking mess caused the country to endure a “lost decade” of economic stagnation. If America wants to avoid Japan’s decline, the House should follow the Senate’s lead and approve the bailout — immediately.

Just as in the U.S. today, most Japanese did not initially appreciate how devastating a banking crisis could be to the real economy. Banks and real estate tycoons in Japan were corrupt, profligate and unsympathetic figures, and no one wanted to help them. On corporate expense accounts, they sipped coffee with gold leaf and patronized “no-panties shabu-shabu” restaurants, which had mirrored floors and miniskirted waitresses.

In short, the businessmen involved were jerks. And, whether in Japan or the U.S., it’s challenging for politicians to frame a bailout with the slogan: Save the jerks!

Japanese politicians didn’t want to rescue such unpopular fat cats and didn’t see any emergency. So Japan’s economy slowly lost air, and the biggest losers were the small futon makers who couldn’t get credit and the farmers on remote islands who lost ferry service when the government eventually had to cut back on spending.

For those of you accustomed to bull markets, who think we’re sure to come out of this quickly, remember this: Japan’s main stock index is still less than one-third of its level of 19 years ago.

In 1993, after Japanese stocks had already tumbled for several years, an American friend told me that he was going to invest in Japanese stocks. “I don’t know what they’re going to do for the next couple of years,” he said, “but we all know that over five years they’ll recover and do better than American stocks.” Since then, Japanese stocks have lost another 40 percent of their value.

The Federal Reserve chairman, Ben Bernanke, is an expert on Japan’s lost decade, and the president of the New York Fed, Timothy Geithner, lived in Tokyo during that debacle, and their experience no doubt is one reason for the urgency of Washington’s response. The lesson from Japan is pretty clear: Hold your nose and support a bailout, in particular to clean up banking assets.

All this said, critics of the bailout have reason to be furious. It is profoundly unfair that working-class American families lose their homes, their jobs, their savings, while plutocrats who caused the problem get rescued.

If the Congressional critics of the bailout want to do some lasting good, they should come back in January — after approving the bailout now — with a series of tough measures to improve governance and inject more fairness in the economy.

A starting point would be to remove tax subsidies on executive pay and allow courts to restructure mortgages as they do other kinds of debt. The Institute for Policy Studies in Washington estimates that U.S. taxpayers every year provide more than $20 billion in tax subsidies for executive pay.

Among the strongest critics of inflated executive pay have been Warren Buffett and the late management guru, Peter Drucker, who argued that C.E.O. salaries should peak at no more than 20 or 25 times those of the average worker. (Last year, C.E.O.’s got an average of 344 times the wages of the typical worker.)

The truth is that with the complicity of boards of directors, C.E.O.’s hijack shareholder wealth in ways that are unconscionable. As The Wall Street Journal reported in June, if Eugene Isenberg, the 78-year-old C.E.O. of Nabors Industries, were to drop dead one of these days, his estate would be entitled to a “severance payment” of at least $263 million — more than the firm’s first-quarter net earnings.

With such greed oozing out of the corporate suite, and with financial companies enjoying the confidence of only 10 percent of Americans today (down from 36 percent in 2000), it’s no wonder that voters are repulsed by the idea of helping banks. Wall Street urgently needs to undertake its own housecleaning, for the public revulsion toward it undermines its own long-term interests.

But, for now, the priority is to get credit flowing again in the arteries of commerce, even if that means saving the jerks. Otherwise, we risk becoming Japan.

I invite you to visit my blog, www.nytimes.com/ontheground, and join me on Facebook at www.facebook.com/kristof.

Copyright 2008 The New York Times Company

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