Hey, Brother, Can You Spare Ten Years?

Whatever their squabbling in Washington this week, one thing upon which Democrats and Republicans were able to agree was the apparent novelty of the country's current financial woes. "We have an unprecedented crisis," said House Minority Leader John Boehner, in a phrase frequently invoked by other congressional leaders. Crisis? Yes. Unprecedented? No way.

No. Not so. Uh-uh. Untrue. EL WRONG-O.

This crisis, in fact, does have a precedent that looks remarkably like the financial running amok that struck Japan 20 years ago, when a stock market nightmare exposed years of speculative lending -- mostly dependent on real estate -- and led to a dramatic economic collapse. In response, Japan's government launched a strategy that actually made the problem worse; the 'cure' morphed to economic plague, which became ten years of stagnation known as Japan's "lost decade. The bad news is that... today... at this moment... the United States is making some of the exact same mistakes.

Japanese banks in the 1980's loaned wildly, gambling on rising real estate prices, and PRESTO... a bubble was born. At one point, the value of land in Japan was reportedly greater on paper than the value of all the land in the rest of the world. But in December 1989 the gamble failed; the stock market fled south and investors realized how many bad loans the banks had made, many of them with Japan's overvalued land as collateral. Most Japanese banks became afraid to lend any more money, and capital dried up. Just like that.

Does any of this sound remotely familiar? Anyone? Anyone?

Bueller?

At first, Japan's leaders propped up the value of financial assets, convinced that the banks -- intertwined as they were with Japanese corporations -- were too important to fail. This protected Japan's ailing banks, allowing them to continue lending when they should have been cutting back. The government also started plowing money into the public sector to keep the economy alive.

More stimulus checks, anyone? Is anyone getting this?

The additional spending was largely directed toward public works projects, shoring up a weak financial system, and subsidies to the weakest of Japan's businesses, which, in retrospect, ought to have been allowed to fail. While the direct stimulus of government works projects and subsidies to weak businesses kept the economy from falling back into negative growth for a time, the weakness resumed once the direct stimulative effects of the spending packages wore off.

-American Enterprise Institute economist John Makin

Indeed, the stimulus just served as a smoke screen. Banks, never forced to acknowledge their mistakes, appeared healthier than they were, and companies that should have gone bankrupt stayed open. Initially, the strategy did produce a minor boost in growth, but the economy never regained its momentum. Worse, Japan became addicted to the idea of recovery without pain. So for ten years, one Japanese prime minister after the next did what they could to keep the economy afloat through multi-billion dollar infusions... yet banks never gained enough confidence to lend aggressively, weak companies barely stayed alive, and uncertainty kept consumers out of the stores.

By 2000, Japan had piled up debt worth more than 150 percent of its gross domestic product, and average citizens were no better off--more than $10 trillion in wealth and savings destroyed since the early '90s.

As in Japan, the US bailout will do nothing to encourage financial institutions to change the business models that got them in trouble in the first place. Instead of accepting that poorly run financial firms must be allowed to fail, Washington decided that many financial institutions, such as American International Group (AIG), are too large to go under--or, as the Fed put it, "in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility."

The real Decider, history itself, respectfully disagrees.

http://www.youtube.com/watch?v=DlVQWbWTlco