Krugman readers know he’s long said “Japan can happen here”, and sometime in the past decade that became a shared consensus among economists. There was nothing uniquely Japanese about their real estate crash and deflationary spiral, and Japan fought mightily to slowly, painfully, turn it around.
We don’t hear much about Japan these days. That’s downright strange – I think Japan is still the world’s 2nd or 3rd largest economy (depending on how you treat the EU).
Time to remember …
… The current U.S. financial crisis bears a strong resemblance to the crisis that hit Japan at the end of the 1980s, and led to a decade-long slump that worried many American economists, including both Mr. Bernanke and yours truly. We wondered whether the same thing could take place here — and economists at the Fed devised strategies that were supposed to prevent that from happening. Above all, the response to a Japan-type financial crisis was supposed to involve a very aggressive combination of interest-rate cuts and fiscal stimulus, designed to prevent the crisis from spilling over into a major slump in the real economy.
When the current crisis hit, Mr. Bernanke was indeed very aggressive about cutting interest rates and pushing funds into the private sector. But despite his cuts, credit became tighter, not easier. And the fiscal stimulus was both too small and poorly targeted, largely because the Bush administration refused to consider any measure that couldn’t be labeled a tax cut.
As a result, as I suggested, the effort to contain the financial crisis seems to be failing. Asset prices are still falling, losses are still mounting, and the unemployment rate has just hit a five-year high. With each passing month, America is looking more and more Japanese.
So yes, the Fannie-Freddie rescue was a good thing. But it takes place in the context of a broader economic struggle — a struggle we seem to be losing…
At least we can benefit from the hard lessons Japan learned. I am confident Obama and his team of economists would do the right thing. If a president McCain were true to his current rhetoric, he’d drive the US economy over a cliff.