Japan’s Lost Decade and What It Means for the US

NPR’s Planet Money podcast has done an excellent job of tracking the ongoing global financial crisis. In its latest installment (StreamiTunes – Rss Feed), they get down to an important question: Does history offer solutions to the current crisis? And if so, does it make sense to look back at the Depression of the 1930s? Or does 1990s Japan offer a better example?

One of Planet Money’s guests, economist Adam Posen, argues that we should keep our eyes on Japan. During the 1980s, Japanese banks and investors exploited loose mortgage lending and generated a substantial real estate bubble, which popped in the early 90s once Japan’s government started tightening credit. From there, all other assets and markets fell apart, and a long recession began. Sound familiar?

For Posen, the actions of the Japanese government help illustrate which anti-recession policies worked, and which didn’t. The upshot is that Japan’s crisis could have been limited to three years. But it went on for a decade instead. And that’s because Japan never passed a major stimulus package until the very end, and because the government never forced the banks to change their practices. This all suggests that American policy can make a difference. The Obama administration has a big stimulus package coming. But will it get the banks under control? I’m less than sanguine about that, and it could make the difference between a short, sharp recession and another lost decade.

PS The conversation mentioned above starts about 3 and 1/2 minutes into the podcast.

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