In assessing Japan's decade-long, stop-and-start effort to repair the damages caused by its stock and real estate bubbles, Morgan Stanley's Robert Alan Feldman comes up with a plan that can be mimicked by other countries. Let's see how the U.S. matches up:
1. Economic strategy. The nation needs an approach to improving the supply side of the economy, be it through education, capital-deepening, technology or corporate reorganization. Strong corporate governance is a part of national economic strategy. The strategy must be formulated with global economic trends in mind.
United States: The primary missing ingredient for the U.S. is education. The university system here is still considered the best in the world, but the U.S. rates poorly in many other metrics. 0 out of 1.
2. Safety net. Those hurt by economic reforms need assurances that they will not be abandoned. Such assurances must extend to a broad range of the populace. The problem is to give support without falling subject to moral hazard. Areas include deposit insurance, money market confidence, small business support, monetary policy and fiscal spending.
United States: Oddly, Feldman leaves out assurances such as universal healthcare and better unemployment benefits, where Japan is also ahead of the U.S. In the other categories, the Fed and the FDIC have moved in recent months to shore up trouble spots. My score - 0.5 out of 1.
3. Capital injections. Restoring confidence in financial institutions requires public capital injections in many cases. The difficulty is to enforce adequate conditionality on stockholders, employees and management while keeping taxpayers happy and keeping the operations of troubled institutions alive.
United States: Ignoring for the moment the questionable terms of the Citigroup bailout, TARP II has helped restore some confidence in banks, but many analysts believe billions more in support is needed. My score - 0.75 out of 1.
4. Public support. When public money is involved, politics becomes involved too; hence public support for the economic strategy, the fairness of the safety net and the conditionality on capital injections are all essential to achieve public support.
United States: As mentioned above, the U.S. is still behind in improving its safety net for millions of Americans that are not bankers, but Barack Obama's win signals public support for greater government intervention in the economy is not a major issue right now. My score - 0.75 out of 1.
5. Strict asset assessment. Confidence in the financial system cannot return unless depositors and investors believe that asset valuations are correct. Oversight agencies must be sufficiently staffed with expert personnel, and must coordinate closely across bureaucratic lines and across international borders. There must be clear, public standards for asset valuations, and clear rules for how to deal with deviations.
United States: As the WSJ reported Friday, expert personnel is still missing at the Treasury. International coordination has improved but still seems piecemeal, and the issue of toxic asset valuation is wholly unresolved. My score - 0.25 out of 1.
Feldman argues that the five measures above didn't ensure a healthy Japanese economy in recent years, in part because the economic strategy formulated earlier this decade has been abandoned. Still, if you agree with Feldman and his five-point plan, then by my count, the U.S. has moved less than halfway towards creating an environment supportive of economic recovery.