New York Times columnist Paul Krugman, a person who freely and proudly states his liberal economic outlook, (See Krugman's book: The Conscience of a Liberal) and his disagreement with the Bush Administration's economic conservatism, once again reminds investors/readers that the U.S. financial crisis is resembling that of Japan's in the late 1980s.Investors/readers will recall that in the late 1980s, fanned by easily obtainable credit, commercial and residential real estate prices skyrocketed in Japan, with investors and speculators continuing to bid-up prices, despite the fact that numerous indicators signaled that prices were astronomically overvalued. Further, Japan's real estate boom occurred during only a modest increase in household formation and amid an aging population. What followed was inevitable: the bubble burst, albeit slowly, and the correction led to a decade-long economic slump for Japan.
Fast-forward to the United States, 2003-2007: intoxicating rises in home prices, fueled by 'extremely creative' mortgage plans, and a belief that out-sized gains would not end soon. Yet all the while, job growth remained modest at best, with falling real wages in many job categories. The U.S. economy was growing, but the growth was not sustainable because it was rooted in a bubble - - a real estate bubble - - not in an increase in the nation's productive capacity and good jobs, so says economist Glen Langan. Or as Langan called it, the U.S. economy in 2003-2007 was, largely, "an asset appreciation economy."
The Fed went to school, but...
The U.S. Federal Reserve, Krugman says, went to school on the Japan slump and devised a strategy that was supposed to prevent it from happening in the United States. The key defensive tactics: rapid, large interest rate cuts and fiscal stimulus to prevent the real estate slump from 'infecting' other sectors of the economy, and triggering a recession.
The above tactics have been deployed, but have they worked? Krugman said monetarily policy hasn't, because credit became tighter, not easier, and, likewise, the fiscal stimulus was too small and incorrectly targeted, primarily because the Bush Administration was against any measure that couldn't be labeled a tax cut.
And as a result, asset prices continue to fall, losses are still increasing, and the unemployment rate continues to rise: it gapped up to 6.1% August from 5.7% in July.
Krugman's grade for public officials' battle to right the U.S. economy? He supports the Fed's rate cuts and the U.S. Treasury's Fan-Fred rescue, but at this juncture the U.S. appears to be losing the broader struggle, he argues.
Economic Analysis: Krugman does not mince words, but we place his analysis in the category of, "One appreciates candor almost as much as one appreciates good news." That said, the view from here is that Krugman is a bit harsh, or at least premature. Briefly, there are differences between the U.S. and Japanese economies, and, equally important, the United States still has time to discover/identify an economic catalyst, and/or to prime the pump with public investments in infrastructure, education, and basic research to point the economy toward recovery.
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Reader Comments (Page 1 of 1)
9-08-2008 @ 4:00PM
Kent said...
I was transferred to Japan in 1982 with my company and experienced the bubble economy that took off in 1986. However signs of it occurred about the time I moved there when rental rates in Tokyo started skyrocketing. I am personally convinced it all began when 2,000 IBM personnel in Hong Kong were relocated to Tokyo. On the crest of this housing demand did the land and construction boom begin to filter across the country. I see this same phenomena occuring in Las Vegas today where the housing and building boom have seen better days. It is reported Japanese after the bubble realized a portfolio loss of $17 trillion in their mortgaged value of land, housing and commercial buildings. I doubt the U.S. will see this kind of catastrophe repeated here, but it is still a sobering experience for us.
9-08-2008 @ 6:57PM
Jeff said...
At the top of this article a reference is made to the "economic conservatism" of the Bush administration. Really! This administration has spent the US into a hole that we may never climb out of. We have borrowed instead of taxing ourselves, passing the buck onto the future instead of having the honesty to pay our own way.
Borrowing is appropriate for long term capital projects such as roads, schools, etc that will benefit future generations as well as ourselves. This administration has been happy to borrow for current expenses ( put it onto the credit card).
I would describe myself as socially liberal and fiscally conservative. The people currently in power are neither.
9-09-2008 @ 11:49AM
George said...
Will the US economy mirror that of Japan's. If we do away with free trade and close the borders to skilled immigrants as many anti-immigrant groups want, it definitely will. Japanese jobs moved abroad to other countries including the US due to its closed door policy and the Japanese soon learnt that lack of foreigners in Japan does not mean more jobs for the Japanese higher wages. In fact, it means less jobs for the Japanese and lower wages in a global economy unlike what anti-immigrant George Borjas likes to think.