Could America Echo Japan's Mistakes?

The worst-case scenario for America would be to follow how Japan dealt with its own banking and housing crisis more than a decade ago.

Megan Barnett of Portfolio magazine describes the eerie similarity between America now and Japan then.

Asset bubble combined with deregulation? Check.

National banking crisis? Check.

Offer of government support? Check.

Acceptance of government (taxpayer/political support)? Check? No way.

Since I worked for the Senate Finance and the Joint Economic Committee in the late 1980s, it is no surprise to me that the proposed bailout plan will not be the plan agreed to by Congress this week. This could not come at a worse time with an election 40 days away. It seems that investors carried away in euphoria last Friday forgot about the role of Congress.

After hours of testimony by U.S. financial mandarins over the last few days, it's looking less and less likely that Washington is going to agree on anything resembling the $700 billion bailout plan presented by Treasury Secretary Henry Paulson. The marketing of this plan has been abysmal.

If the Congress recesses as planned next week without a bailout plan, it won't be pretty.

It took Japan five years to realize that it needed to take decisive and significant action, and only after the Japanese economy went into a tailspin as the banks ceased lending to individuals and institutions. It wasn't until the average Japanese citizen was truly suffering during the Asian crisis of 1997 that the government stepped in to bail out the country's banks.

The problems facing the credit-crunched banks and the U.S. taxpayers today are similar, but the full impact and magnitude is not being appreciated.

Here’s some historical perspective.

After the Resolution Trust was established in 1989 to clean up the S&L mess, it took a year for the stock market to bottom and three years for the housing market to bottom. In the Japan banking crisis begun in 1997, it took five years for the market to bottom. And the Swedish credit fiasco in the early 1990s led to a 28-month bear market.

Let’s hope our recovery is sooner rather than later, but all indications are that many parts of the world will recover faster than we do.

Comments

[investor88:]

Carl has provided a useful perspective of other historical financial/property crises. This means no V shaped recovery even with the Paulson mega bailout fund. There is still time for investors to assess, things may get worse before it stabilises going by historical comparison.

2008 Sep 24 11:25 PM

[Homer II:]

The fundamental reason that Japan has never really recovered fully from their market declines of the 1990s, is their national psyche doesn't allow them to accept failure and blame. They consider it dishonorable, and customs [used to?] even dictate that they commit Hari Kari. But, our society doesn't suffer from that problem: we can admit defeat, failure and have the tenacity to fight back, evolve and persevere over past mistakes, in all of our endeavors, which makes us the great nation that we are.

2008 Sep 25 06:29 PM

[Dame Daxx:]

I like the Swedish example, where the Govt took an equity stake in banks so that the Taxpayer got some upside when the housing market rebounded.

If we're going to Socialize the Losses, then let's Socialize the Gains.

2008 Sep 27 09:26 PM