One argument put forth by those who deny that the bursting credit bubble will lead to hard times is the fact that authorities have the lessons of the past to go on. Unfortunately, that knowledge didn't seem to do much good when the Japanese were faced with a similar deflationary unraveling during the 1990s.
While it is always possible that this time will, you know, be different, I believe there are always going to be certain influences that get in the way of finding solutions that truly are the least painful. The list includes any number of human behavioral foibles, including an aversion to recognizing losses quickly and in full, as well as the realities of democratic politics.
That is one reason why I am less than optimistic that those in charge here will heed the warning of Bloomberg commentator William Pesek, writing in "Japan Ghosts of Bubbles Past Haunt U.S. in 2008," to "begin taking the lessons of Japan more seriously."
In early 2001, economist Stephen Roach raised a warning flag that enraged many peers: The U.S. risks repeating Japan's mistakes of the 1990s.
It was during the darkest days of the Nasdaq crash that Roach, then Morgan Stanley's chief economist, began worrying Japan's malaise could be repeated in the No. 1 economy. The concern was less about the loss of wealth than policy makers papering over economic cracks with easy money.
Roach called it the "bubble fix," a policy then-Federal Reserve Chairman Alan Greenspan is now at great pains to justify. Ben Bernanke hasn't deviated from that strategy since succeeding Greenspan in February 2006.
At its core is a Bank of Japan-like belief that low short- term rates and liquidity are the cure for sliding stocks, plunging real estate prices and lost investor confidence. As 2008 begins, U.S. policy makers need to look long and hard at whether they're repeating Japan's mistakes.
"The only lesson the U.S. has learned from Japan is how to clean up the post-bubble mess," says Roach, now chairman of Morgan Stanley in Asia. "America has failed to learn the much more important lesson -- how to avoid dangerously destabilizing bubbles in the first place. The Greenspan/Bernanke ideology still places disproportionate emphasis on the former while ignoring the latter at great peril."
The argument against the U.S. suffering a Japan-like lost decade lay in the economy's structure. The U.S. banking system is sounder than Japan's was in the 1990s, while the Fed is thought to be more independent than the Bank of Japan.
U.S. Versus Japan
U.S. accounting rules are thought to make it harder for banks to hide losses. The lack of cross-holdings of equities that wreaked havoc on Japanese balance sheets also is worth mentioning. And with oil prices near $100 per barrel, U.S. stagflation seems more likely than deflation.
Yet it's becoming clearer that the problems facing the U.S.
