Crisis: US banks cut Japanese in 80s by reducing leverage from 24:1 to 7:1. Why not just increase leverage?

Japan went into a deep recession in the 1980s partly because their banks had to reduce their leverage and so they needed to raise more capital and so they had so much in bad debt that they had little capital and the would not clean the bad loans out.





Today, these bad loans can be absorbed in 2 ways at least. One is for the government to buy the loans. This is the Paulson approach.





The other is just to reduce the capital requirements and provide a government guarantee, which will not have any cost in terms of public accounts.





It is true that this would break the USA out of the requirements of the Swiss based Bank for International Settlements, but the whole capital restriction game was merely imposed to stop the Japanese banks competing in the West, because of high Japanese savings rates implying cheap access to leverage. This was so Western bankers could make more money. Because the Japanese stock market was much less strong than in the West.





Who cares?





Only people at the Fed and Treasury who do not want to be embarrassed internationally, but why should US taxpayers spend billions to save their faces. They should have done better.





The Europeans and the Japanese would roll over on these requirements, with enough US pressure. Even the Russians are in pain at the moment.|||That would be a great idea,that's probably why we won't do it.