Avoid a Repeat of the Japanese Malaise: Let Markets Work
Joe Peek - University of Kentucky
A current discussion topic of immense interest and importance is the extent to which the current banking crisis, keyed, in part, by problems in the U.S. subprime mortgage market that then spread throughout financial markets more generally, could lead to a persistent stagnation in the U.S. economy that resembles the prolonged malaise in Japan beginning in the early 1990s. After providing a brief overview of the Japanese banking crisis and some explanations for its persistence, I will discuss why I do not believe that the U.S. economy is likely to follow a similar path. Among the themes running through the discussion are the procrastination of Japanese government officials unwilling to make the tough decisions that might have ended the banking problems much earlier; the near total lack of credibility of government pronouncements concerning the severity of the banking problems; and the widespread aversion to relying on market signals and market forces, by firms, banks and the government. In essence, the fundamental differences between Japanese capitalism and U.S. capitalism in the extent to which politicians are willing to let the market work (market discipline) and regulatory agencies work (regulator discipline) are key considerations in arguing that the response of the economy to the adverse shocks to the real estate market, the stock market, and financial markets more generally will not have long-lasting effects on the U.S. economy.