Lessons From Japan: A Lost Decade

The NY Times this week had an interesting article on Japan's 1990s economic woes, often called a "lost decade." If I understand the economics lesson correctly, President Obama's victory in Congress with the economic stimulus bill is just the beginning of more targeted spending that will be necessary, despite what Republicans would have you believe.

In fact, the Obama administration is likely loathe to tell us how much the economic rescue will eventually cost, if they even know. We would all be in shock. However, to not do enough and to not do it soon enough could ultimately doom us to a very dark future.

I know Obama is smart and has smart people working with him who understand what could happen. The lessons from Japan in the 1990s are very instructive. However, given that Obama needed three Republicans on the current stimulus bill indicates to me that bipartisanship remains an elusive if not impossible goal and that Republicans will do their best to block future economic stimulus and bank rescue bills. What options then? Since the budget bill is not subject to Senate fillibuster rules, this is probably the next way that Obama intends to spend money to stimulate the economy and rescue banks.
The Obama administration is committing huge sums of money to rescuing banks, but the veterans of Japan’s banking crisis have three words for the Americans: more money, faster.

One reason Japan’s leaders were so ineffectual for so long was their fear of stoking public outrage. With each act of the bailout, anger grew, making politicians more reluctant to force real reform, which only delayed the day of reckoning and increased the ultimate price tag. Japanese taxpayers are estimated to have recouped less than half what it cost the government to bail out the banks.

A further lesson from Japan is that the bank rescue will determine the fate of the wider economy. While President Obama has prioritized his stimulus plan, no stimulus is likely to succeed unless the banking sector is repaired.

The Japanese crisis of the 1990s and early 2000s had roots similar to the American crisis: a real estate bubble that collapsed, leaving banks holding trillions of yen in loans that were virtually worthless. [NY Times]
Ultimately, economics is an inexact science, and I am sure there are plenty of good arguments to the contrary. However, I am also reminded of the quote by George Santayana: "Those who cannot learn from history are doomed to repeat it."
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