The ‘Finance and Economics’ section of the February 12 issue of the Economist magazine contains a compelling article that draws parallels between the current U.S. banking crisis and similar experiences by other rich nations — and more specifically in comparison to Japan’s experience. To paraphrase, history, it says, offers a rich array of banking crises from which policymakers can draw important lessons against which today’s rescue plans can be compared. Based on IMF data, since 1970 half a dozen rich-country crashes — from Japan’s slump after its property bubble burst in the late 1980s, to the Nordic bank crises in the early 1990s. All involved deep recessions, required massive government intervention to clean up bust banks, and led to big increases in public debt as economies shrank while government spending soared — episodes in which bad debts soared across the economy and much of the banking sector was insolvent — much like the current U.S. crisis.
But the speed of recovery differed dramatically; Japan endured a decade of economic stagnation, whereas South Korea returned to growth within two years of its 1997 banking disaster. Received wisdom holds that policy choices determined the pace of recovery. Sweden rebounded quickly because it acted fast: removing dud assets from banks’ balance-sheets, recapitalising weak banks and nationalising where necessary. Japan stalled for a decade because it took years to recognize the scale of its mess.
NOW back to the future: In his first Presidential news conference on February 9th, Barack Obama pointed to Japan as an example of what not to do. Its “lost decade”, he argued, was the consequence of “not act[ing] boldly or swiftly enough”.
There is truth to that analysis. (Read more…
http://www.economist.com/finance/displaystory.cfm?story_id=13110352 )