EDITORIAL: U.S. financial crisis

The financial meltdown in the United States is deepening and the turmoil in financial markets continues. A strong uncertainty has developed, with concerns of how long the situation of falling stock prices and a weakening dollar will remain throughout the world and whether a global recession is on the horizon.

JPMorgan Chase & Co., a major commercial U.S. bank, agreed to rescue Bear Stearns Cos. on March 16, buying the U.S. securities firm for the exceptionally low price of $2 (199 yen) per share, highlighting the seriousness of the crisis. On Tuesday, the Federal Reserve Board substantially cut the federal fund rate to 2.25 percent. U.S. interest rates have been reduced by a total of 3 percentage points since autumn 2007.

However, this crisis will not be solved simply by slashing interest rates. The root of the problem is a collapsed housing bubble that has led to capital shortfalls at many banks and securities firms. Unless that is corrected, the financial system will continue to be paralyzed.

Banks' self-supporting efforts by reinforcing capital will not be enough, and the government will eventually have to inject public funds to solve the problem.

U.S. President George W. Bush has not decided on an injection of public funds, partly because the government fears a public backlash for helping out financial institutions without questioning executives about the high compensation they received during the economic bubble.

An injection of public funds was delayed in Japan when the country faced a financial crisis, partly because of criticism of special treatment for the banking sector.

At the same time, caution is required when injecting public funds to prevent support of a bubble that could expand even further in the future.

However, if major financial institutions declare bankruptcy, financial markets throughout the world will fall into chaos. Financial authorities have no choice other than to prevent such bankruptcies. In the bailout plan for Bear Stearns, the FRB decided on the unusual move of guaranteeing a special loan. In a sense, it can be said that public funds have already been used to avoid a crisis.

The next focus is when and how the U.S. government will use public tax money. During Japan's financial crisis about 10 years ago, the government and the Bank of Japan injected public funds in several stages through a trial and error process, but it took a long time to break free from the downturn. The United States is also expected to face difficulties to resolve the financial confusion.

Judging from the upturn of housing prices during the bubble, the retraction is still small. But the collapse of the bubble is still in its initial stages. Japan should brace itself for a continuing cold wind from the United States.

The Japanese government has made a downward adjustment on its economic assessment, saying the Japanese economy was faltering amid sluggish output and spending. It has become increasingly difficult to steer the economy.

Under such circumstances, it is outrageous that the government has still not chosen a BOJ governor to navigate the world's second-largest economy.

In today's world, where massive amounts of money move freely across national borders, central bank leaders should be in close contact with each other to quickly deal with disorder in financial markets.

Concerns about worldwide inflation are also rising. It is not necessarily ideal for many countries to ape each other by slashing interest rates. The central banks in each country have to make their own difficult decisions.

In light of the teetering global economy, Japan must appoint the next BOJ governor as soon as possible.

--The Asahi Shimbun, March 21(IHT/Asahi: March 22,2008)