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The Paulson Plan is not Enough,
and Wrong in Sequence

By Kenichi Ohmae*
2008/10/1

Tokyo---The US Congress has refused to pass the $700 billion bail out plan for the time being. That may turn out to be appropriate, if the Congress correctly understands the priorities at hand. The issue, however, is not whether the situation should be left to the market or whether the government should save those who lose their house due to foreclosure. At this moment the main challenge is to provide liquidity to the market, particularly to the failing financial institutions. From the experience of Japan throughout the 90's and also from the experience of Nordic countries, it is clear that the US financial crisis is also going through a sequence of events, almost physical, and also psychological, events, very similar to what happened elsewhere in the world. The problem is that the United States leadership does not seem to understand exactly what happened there and what lessons to reflect on their "impulsive" and "almost" heroic actions they have exhibited over the last few months. Congress on the other hand should not revenge these heroes with corrections and modifications, which are obviously designed for election campaigns. Their time will come later, when the dust settles and lessons learned.

Now that the Paulson bail out plan is temporarily suspended, it may not be too late to state, in English for the first time, what I have been talking and writing in Japan about the problems of the US approach to solve their financial crisis and a possible solution to the imminent threats of meltdown of global banking systems.

There are three principles you need to observe in a major financial crisis like this:

(1) Treat it as a systemic failure and do not act on individual situations
(2) Know the sequence of events, so you solve the right problem at the right time
(3) Construct a universal system, later, to avoid the similar problems to occur again

The US Government seems to be violating every one of these three principles and hence aggravating the situation, which is already bad enough.

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