Richard Katz, who knows a whole lot more about Japan than I do, writes in the new Foreign Affairs that likening our government’s handling of the financial crisis so far to Japan in the 1990s is balderdash:
It took the Bank of Japan nearly nine years to bring the overnight interest rate from its 1991 peak of eight percent down to zero. The U.S. Federal Reserve did that within 16 months of declaring a financial emergency, which it did in August 2007. It has also applied all sorts of unconventional measures to keep credit from drying up.
It took Tokyo eight years to use public money to recapitalize the banks; Washington began to do so in less than a year. Worse yet, Tokyo used government money to help the banks keep lending to insolvent borrowers; U.S. banks have been rapidly writing off their bad debt. Although Tokyo did eventually apply many fiscal stimulus measures, it did so too late and too erratically to have a sufficient impact. The U.S. government, by contrast, has already applied fiscal stimulus, and the Obama administration is proposing a multiyear program totaling as much as five to six percent of U.S. GDP.
I’ve made this same point myself, so I certainly don’t disagree with Katz. It does always worry me, though, when people (including myself) say We’re not going to fall into this particular trap because we’ve learned from others’ mistakes, or we’re better, or whatever. Because, you know, maybe we’ll just fall into some other trap.
The great Peter Bernstein has a disconcerting piece in today’s FT about the impossibility of saying anything conclusive about the long run:
Will our economy and society emerge so risk-averse after these experiences that years will have to pass before we return to a system naturally generating vibrant economic growth and a renewed willingness to both borrow and lend? Or will we head in the opposite direction, where faith in ultimate bail-outs will justify the wildest kind of risk-taking? Or will the entire structure collapse from government debts and deficits that turn out to be so unmanageable that chaos is the ultimate result?
We can neither answer those questions nor can we claim they are a complete list of the possibilities. The unknown today seems more than usually unknown. Then my whole point remains the same. The long run is an impenetrable mystery. It always has been.
So no, we’re not going to have a lost decade like Japan’s. But we might have an even worse one.