Turning Japanese, No We're Not Turning Japanese (He Doesn't Think So)

Writing in Foreign Affairs, Richard Katz (Editor in Chief of The Oriental Economist Alert and the author of Japanese Phoenix: The Long Road to Economic Revival) argues that comparisons of the current US crisis to Japan's "Lost Decade" are overdone:

In periods of crisis, pundits and policymakers tend to scramble for historical analogies. This time, many have seized on Japan's notorious "lost decade," the decade of stagnation that followed a mammoth property bubble in the late 1980s. But this comparison is wrong. In Japan, the primary problem was pervasive dysfunction in the economy, which caused a banking crisis. In the United States, pervasive dysfunction in the financial sector has caused a deep recession in the economy as a whole. This financial dysfunction is not the result of structural flaws, as in Japan, but of grave policy mistakes. It is now being compounded by widespread investor panic.

The consequences of the 2008 U.S. financial crisis will be different from Japan's slump in the 1990s for three reasons: the cause of the current crisis is fundamentally different, its scope is far smaller, and the response of policymakers has been quicker and more effective.

In other words, in Japan the banks were a symptom of their economic dysfunction, not a cause.  A bit more:

Japan's malaise was woven into the very fabric of its political economy. The country has a thin social safety net, and so in order to protect jobs, weak domestic firms and industries were sheltered from competition by a host of regulations and collusion among companies. Ultimately, that system limited productivity and potential growth. The problem was compounded by built-in economic anorexia. Personal consumption lagged, not because people refused to spend but because the same structural flaws caused real household income to keep falling as a share of real GDP. To make up for the shortfall in demand, the government used low interest rates as a steroid to pump up business investment. The result was a mountain of money-losing capital stock and bad debt.

Japan's crisis pervaded virtually its entire corporate world. In sector after sector, debt levels and excess capacity ballooned and profitability remained low. White-elephant projects, from office buildings to auto plants, were built on borrowed money under the assumption that if times got tough, the government and banks would bail out the debtors. But the banks were too poorly capitalized to write off bad loans. And for every bad loan, there was a bad borrower whose products were not worth the cost to make them. The cumulative total of bank losses on bad debt between 1993 and 2005 added up to nearly 20 percent of GDP.

Policy mistakes -- from Japan's mismanaged fiscal and monetary policy to the government's failure to address the loan crisis -- made a bad situation even worse. But even if policymakers had done everything right, Japan's economy still would have stagnated until Tokyo addressed its more fundamental flaws.

I made a similar point last Valentine's Day (and people fret about the death of romance...) - Japan's problem wasn't just the zombie banks, it was the zombie companies to whom they extended new loans in order to avoid write-downs on past loans.  The US analogy would be that we kept Citigroup propped up so it could continue to lend to an unreconstructed General Motors rather than to innovative rivals to General Motors.

TO BE CONTINUED: I dispute Mr. Katz history of the AIG collapse.  His description closely links the AIG collapse to Lehman:

The collapse of the investment bank Lehman Brothers caused the insurance company AIG to lose big in so-called credit default swaps, undermining trust in all counterparties and causing a run on the entire derivatives and securitization markets. Rather than frightened depositors banging on bank doors, the result was investors furiously clicking away at their keyboards as their money disappeared. In the end, the impact was the same: perfectly solid companies suddenly found themselves unable to issue commercial paper, and creditworthy homeowners found it hard to get car or student loans. It took an intervention by the Federal Reserve to forestall a more serious meltdown.

Hmm.  The Lehman collapse caused a major money market fund to "break the buck" and suspend withdrawals, thereby sending panic through the money market investors and crushing the money market funds big investment outlet, the commercial paper market.

The AIG collapse was triggered by a credit downgrade which obliged them to pony up $10 to $15 billion of collateral on Credit Derivatives Swaps.

AND BY WAY OF CONTRAST:  Here is Paul Krugman:

The actual plan seems to be to keep the banks semi-alive by implicitly guaranteeing their liabilities and dribbling in money as necessary, all the while proclaiming that they’re adequately capitalized — and hope that things turn up. It’s Japan all over again.

And the result will probably be a deeper, long-lasting crisis.

[END OF THREAD]

Comments

[kim]

They have a homogeneity of culture that allowed them to pull through, uncomplainingly. Never happen here. Blood in the streets sooner.
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[kim]

What? Japan has a 'thin social safety net'? One man's 'pervasive dysfunction' is another man's 'grave policy mistakes'. I don't think I agree with this guy. Maybe I ought to finish the article, but sometimes it just gets too annoying.
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[madawaskan]

Explain to me after carbon caps, the union card check law, the new Obama taxes, the new minumum wage hike coming down the pike, the new health insurance minumum regulations, the new taxes on funds made overseas-

How we are NOT going to end up with Zombie companies?

Oh ya-we aren't going to have them-they'll fold.

I get it.

[kim]

Hey, we'll have 'pervasive dysfunction' and 'grave policy mistakes'. Can't let those Japanese outdo us. It's all good. Just genuflect 5 times daily toward DC.
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[Rick Ballard]

If powerful financial lobbyists waving the banner of faith in markets had not thwarted commonsense regulation, much of this would never have occurred. Democratic and Republican policymakers alike, from Treasury Secretaries Robert Rubin and Lawrence Summers to Federal Reserve Chair Greenspan, blocked attempts at reform in 1998. Then, in 2000, Senator Phil Gramm (R-Tex.) went so far as to virtually outlaw the monitoring and regulation of many types of derivatives by initiating the Commodity Futures Modernization Act. Just as deposit insurance now prevents massive runs on banks, the regulation of derivatives could have made this crisis less severe.

The Gramm legislation passed in 2000. It was initially written in 1998. If one considers that Blythe Masters and her crew at JPM began development of CDS (as we know them today) in 1997, the author's inclusion of Gramm among the suspects is, how shall I put this, utter poppycock.

That leaves Summers, Rubin and Greenspan. Of those three, Greenspan takes first, second and third place. He's the one who sat on his thumb as CDS grew like Topsy and he's the one who failed to notice that it was a poisonous weed rather than part of the crop.

The author's failure to identify the interlocking network of relationships which make up Japan's keiretsu and compare that network to the incestuous and thus uniformly intellectually deficient makeup of the boards of most US financial companies make his analysis somewhat suspect. The failure to identify the structural demographic differences between Japan and the US do not diminish the suspicion that this is an unimportant gloss on the problem, designed to distract rather than to inform.

[clarice]

I don't think we are exactly like Japan but I do think that the changes O wishes to make would bring us closer to that end.I think the author's claim that here,
"the response of policymakers has been quicker and more effective" is risible.
As far as i can see a great deal of that response is aimed at creating sclerosis in our markets..in everything from wages and working conditions to trade.

[Amused bystander]

Mr. Katz is another credentialized moron, and a sinister one too boot. This is worse than nonsense, it is propaganda for a vile and evil agenda.

The whole point of this agitprop is to mask the real intent of the Obama administration: To implement permanent and radical socialist, totalitarianism changes to America in order to kill off the Republic as we have know her throughout her history, and replace her with a compliant province in a new, international, socialist/tranzi order. It has nothing to do with "recovering from a recession" or "preventing a depression". The outlays and strategies he is proposing are far beyond any immediate crisis, and his tactics are vilely dishonorable, underhanded, indecent and of questionable legality.. This grasp of power goes beyond anythings FDR did in the !930's when conditions were much harsher. We certainly have not gotten yet to the point of crisis of the other post WW2 recessions at this point in time.

They well might succeed.

We are in for a tsunami of treasonous propaganda from every traditional Liberal intellectual and media sector, and we may yet see legal and illegal intimidation and thuggery.

Obama's wildly leftist agenda is now with this budget out in the open for all to see, and it is a direct assault on all we hold dear in this nation. If he succeeds it will shred what little is left of the Constitution and destroy the capital of the productive and creative classes reducing them to poverty and government servitude. America's status as a superpower, the sole superpower to stand up for what is right, good and true, will pass from history.

It is no exaggeration to say that our very way of life is a risk.

They are attempting to wipe out all of the progress of the last 60 years.

The Republic has never been in greater danger.

Mr. Katz and his whole band of villains need to be rebuked, not humored or their opinions honered.

[MayBee]

Japan does have a pretty thin social safety net. They have nationalized health care for those that need it, and/or companies are required to contribute to insurance for you.
They do also have pensions.
But their society is built on jobs for life and family responsibility.
The parks in Tokyo are filled with little tarp towns of men who lost their jobs in the recession. They are on a holding pattern until they can collect their old age pension.

Welfare is really hard to get- you are expected to work first, get help from your family second, and then get some welfare.

[Rick Ballard]

Clarice,

We're nothing like Japan or Europe wrt demographics. We're still gaining population, albeit with the growth edge coming from immigration rather than births. A 1% annual population growth rate coupled with a 2% annual productivity increase will give a rather vibrant economy.

Feeding the banking and UAW zombies is deleterious to the economy. The Fed and Treasury have the mechanisms in place now to let them slide into the grave and further attempts at animation serve only to keep the boards, which have completely failed in their fiduciary duties, drawing compensation for ineptitude.

The Obummer/Turbo team's focus on zombie animation is going to lengthen and exacerbate the recession. I think they can drive unemployment over 10% without much additional effort. It's just a shame that unemployment among professors and school teachers isn't keeping pace. Yet.

[Pofarmer]

its scope is far smaller, and the response of policymakers has been quicker and more effective.

As has been discussed here before, the "response" has been for the govt to spend TONS of money. Except, in Japans case, it was mainly the citizens of Japan who's money was spent. In the case of the U.S.??? Not so much. We're going to borrow or print the money, which, ultimately, cold make our situation much worse.

[clarice]

Today, the Administration announced it was ending govt subsidies to college lenders, virtually putting Sallie Mae out of business and insuring that anyone who needs a college loan must go thru the govt directly. Big Momma will soon control everything..And how tough do you suppose the govt will be on collecting from deadbeats? HEH..The money catarrh continues unabated.

[kim]

It is a thin social net by western socialist standards. You said a mouthful there when you said 'family responsibility'. That's not a net, it's a fabric with warp and woof.

However, you've seen the tent towns. I saw the place ten years after Hiroshima.
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[Neo]

This was too funny ..
the Obama plan to stimulate the banking sector

[clarice]

Here's another view--and I agree with it:

http://www.americanthinker.com/2009/02/the_obama_steamroller_is_resis.html>Steamrolled to hell

[Ignatz Ratzkywatzky]

We're not turning Japanese, we're turning Swedish or Dutch or Belgian; pick whichever dissipated, enervated, morally and culturally defenseless EU basket case you like.

Is anyone else surprised at the lack of reaction to Barry's insane budget? The Catholic Worker would have found it a little too edgy and radical 10 or 20 years ago.
He is clearly patterning his presidency on FDR, hoping that his policies do not take the blame for the economic malaise they will cause to continue. I however am hopeful that he has miscalculated and is in fact hoping for something that may not be able to be pulled off any longer. The MSM is of course in the tank but it will be a good test of IT to see if the people will be as easily gulled as they were in the thirties.
The other miscalculation he is making is that he is bringing his massive tax hikes forward too soon. FDR was reelected in 1936 becuse the economy had staged a pretty decent comeback from 32-36. He saved his most massive tax increases for 1937 which destroyed any gains that had been made, and then some. If Barry pushes his hikes through too early 2012 could be a total disaster for him.

[MayBee]

It is a thin social net by western socialist standards. You said a mouthful there when you said 'family responsibility'. That's not a net, it's a fabric with warp and woof.

Excellent point.
Another thing-- the Japanese don't waste any money on illegal immigrants. They are unapologetic immigration cracker-downers.

[MayBee]

I think Obama would like to make us more like China, but with voting rights.

China is the only Asian nation I've heard him praise. He keeps sniping at Japan (and Tuesday night, at Korea).

[Pofarmer]

They are unapologetic immigration cracker-downers.

Whereas Barry's main constituency are just crack-downers.

Sorry, couldn't resist.

[Fresh Air]

Ignatz--

I think Barry's hubris has gotten the better of him. ALL of this is too soon, it's a naked, aggressive assault on everything that's happened since Reagan took office. He's leaving the military pretty much alone...for now.

But he's given the GOP and conservatives a massive opening. It's a strategic blunder of Gallipolean proportions. It must be capitalized upon or we really are doomed.

[RichatUF]

Ignatz-

Is anyone else surprised at the lack of reaction to Barry's insane budget?

I was trying to make people angry over on the straw thread. It's a budget-it would be like Obermann giving play-by-play of paint drying.

He is clearly patterning his presidency on FDR, hoping that his policies do not take the blame for the economic malaise they will cause to continue.

I would call the Administration's budget staffers who put it together delusional. The assumption is that the recovery will be equliviant to Reagan's in 83-84 and "Clinton's recovery" in the early 90's. Reagan's policy shifts were revolutionary and Clinton was incredibly lucky.

Obama Administration assumptions are 1.2% growth for all of 09 and 5.8% unemployment and 2.2% growth in 2010. He books as significant revenue gains a carbon tax, ridiculous "savings" under the "We hate the oil and gas industry" (we'll be considerably more dependent on foreign oil at the end of Obama's term), and even more laughable "savings" from eliminating fraud, waste, and abuse in Medicare (things like discouraging readmitting patients who receive Medicare-like Grandma and Grandpa really like spending a few nights in the hospital).

I was trying to figure out if Obama's budget staffers did the budget first in crayon and fingerpaints or if thought they were writing a Dear Santa letter.

[Jim Ryan]

You think you're disturbed about our prospects? Read the comments at the link clarice posted above. Good night, nurse!

[RichatUF]

Maybee-

Obama's friends from the Weather Underground were big fans of Mao's Cultural Revolution and Great Leap Forward so it doesn't surprise me that he would get misty-eyed thinking of all their "good works".

China is the only Asian nation I've heard him praise. He keeps sniping at Japan (and Tuesday night, at Korea).

He was trashing Korea. Good job Obama, the South Koreans are useful at keeping tabs on the North Koreans in Africa and the Middle East. Wonder how the Israelies knew the North Koreans were running around helping the Syrians build up their nuclear program? A bombing mission he said he supported at AIPAC by the way.

[Fresh Air]

Rich & Clarice--

I think that guy's a bit too pessimistic. Remember 1980? Barry's burning down the house in order to save it. You can't create a "permanent" majority of anything in this country, certainly not with a $2 trillion spendathon, regardless of how many special interests you featherbed. Rewarding unions? Won't save them, sorry. Kansas senate seat up for grabs, maybe Texas? Barf. Seriously, chin up, people!

[MayBee]

I think Obama is trying to put our troops to sleep.

[MayBee]

I think it's nice of Obama not to put the troops in the uncomfortable position of having to interrupt him with applause and shouts of approval.

[RichatUF]

Fresh Air-

Seriously, chin up, people!

The Administration is going to be a disaster. The Brit that said it will all end in tears had it right.

[Ignatz Ratzkywatzky]

I was trying to make people angry over on the straw thread. It's a budget-it would be like Obermann giving play-by-play of paint drying.

Rich,
I know the nuts and bolts are boring, but the macro part of it should cause an uprising in the street;
1.6 Trillion, with a T, in new taxes;
four Trillion dollar budgets;
the overarching pea and thimble accounting;
the elimination of tax incentives for oil exploration coupled with the already tried and failed cap and spend idiocy;
the effective takeover of massive areas of the economy.

If nothing else it should prompt a call for tossing a rope over a lamp post and tracking down Doug Kmiec, Chris Buckley and the rest of the gonadless 'conservatives' who told us this jug eared Jacobin was going to govern from the center.

[Fresh Air]

Rich--

I completely understand and agree. President Chauncey Hussein Gardner will not even grow petunias in the spring. God knows what kind of foreign policy debacle he will get us into.

I just don't think the conservative movement and Republicans in general need fear some "100-year Reich." We're looking at more like a four-year one if I estimate correctly.

[Ignatz Ratzkywatzky]

Here is an article by the increasingly unserious Bruce Bartlett.
In it he describes how previous tax increases by Reagan and Clinton didn't lead to disaster, conveniently not mentioning that each of their increases were accompanied by massive marginal tax cuts. In Reagan's case of course it was the huge cut in marginal income rates and in Clinton's it was the cut in the capital gains rate.
I used to respect the guy, corresponded with him a time or two, but he has gotten more sloppy and silly for several years now.

[Matt]

Regarding Japan, the government added to the problem with massive public works projects. On top of those programs, Kobe was badly damaged in the 1995 earthquake with its own requirements for rebuilding.

The debt the government took on was actually a major structural destabilizer and is one of the factors contributing to the malaise that was in place even until last year. I am not sure how well set up their government is now to go back to the markets and borrow again, but I know they still have serious structural imbalances.

In addition, construction is one of the most opaque and corrupt sectors of the Japanese economy, so real world numbers are very hard to come by. How much of that money simply disappeared into other things no one knows. Political slush funds, Yakuza accounts, personal bank accounts of certain high level managers and government officials.

The RE bubble in Japan was more of a tulip mania, everybody's going to get rich phenomenon. It fed on itself until the balloon popped. In Tokyo, there were massive land reclamation/construction projects that are ongoing. Whether there will be a profit is doubtful.

So the combination of misapplied government stimulus and heavy borrowing, along with hypercompetitive markets and the constant drive to cut costs at the Keiritsu left the corporate sector with very thin margins. In a capitalist, or even socialist society, somewhere, someone has to make a profit at the end of the day or the economy collapses.

Japan is on very thin ice just like Europe and the States right now. But they are definitely not the model to follow. Unfortunately the current U.S. bailout is a dog's lunch of programs and pork that really do nothing structurally to lay the groundwork for economic growth.

[MayBee]

Ignatz - Clinton also did make the effort to reduce on the spending end.
My problem with Obama is not just that he wants to raise taxes, it's that he wants to increase spending even more than he currently plans to raise taxes. And then claims he'll reduce the deficit.

Obama's proposal to raise taxes only on the upper two brackets- while cutting taxes on the lower- is a political choice, not a fiscal one. His ultimate goal is different than Clinton's ever was.

[Ignatz Ratzkywatzky]

Another excellent column by Holman Jenkins at the WSJ.
Especially the last paragraph about how Barry is fooling himself if he thinks he can preside over a depression to his political advantage like FDR.

[sbw]

I recall "Fearless Leader" and see some of his traits along with those of Boris and Natasha.

This will not last.

[Ignatz Ratzkywatzky]

Clinton also did make the effort to reduce on the spending end.

Maybee,
Clinton only voluntarily restrained military spending. The Repubs forced domestic spending restraint on him until they themselves decided they'd like to be even bigger spenders than Dems after 2000.

Obama's proposal to raise taxes only on the upper two brackets- while cutting taxes on the lower- is a political choice, not a fiscal one.

It's also an impossible choice. He's probably not stupid enough to raise taxes on the middle class directly but they'll pay for indirect ones just the same.

[MayBee]

Clinton only voluntarily restrained military spending. The Repubs forced domestic spending restraint on him until they themselves decided they'd like to be even bigger spenders than Dems after 2000.

To be fair, Clinton later claimed credit for the spending restraint :)

I understand Frum to be saying, Obama won't necessarily be a disaster with his tax policies because Clinton wasn't and a lot of people thought he would be.
But so far, nothing is the same.
I think the lesson Obama learned from the Clinton era wasn't that tax + fiscal restraint = good economy.
Instead, he learned everything needs to be pushed through at once so nobody puts any brakes on your dreams of changing the American economy.

[Amused bystander]

It is an absurd argument coming from Frum (and bartlett)_. Obama is pushing through radical transformations, not just raising taxes.

As I said above, we are going to hear nonstop propaganda, and out of the strange corners it seems.

I suggest that people who have democrat congressmen start protesting.

We must fight this tooth and nail. everyone must get off their bottoms and do anything that they can. If that means calling everyone in the House every day, so be it.

[MayBee]

Oh sorry! Bartlett!

[DebinNC]

Holman Jenkins: "The day is gone when politicians could have hoped to have begun and ended their careers before the public ever faced the implosion of redistribution programs that depend on the workforce growing faster than the retired population."

Obama's day of reckoning is coming. Not as soon as I'd like, but sooner than he thinks.

[Pofarmer]

Republicans in general need fear some "100-year Reich." We're looking at more like a four-year one if I estimate correctly.

We might very well be paying for it that long, however. All of this is going to require an awful lot of "undoing" by someone, or several someones, who don't care if they have any political capital left when they get done. We simply cannot afford this, and those that are proposing that we can don't have a clue.