There’s an excellent article in the most recent issue of The Economist comparing the credit crisis in the U.S. with other financial debacles. Well worth a read.
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 recognise the scale of its mess. 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. Japan’s central bank took too long to fight deflation; its fiscal stimulus was cut off too quickly with an ill-judged tax increase in 1997; and it did not begin to clean up and recapitalise its banks until 1998, almost a decade after the bubble had burst. But the history of bank failures suggests that Japan’s slump was not only the result of policy errors. Its problems were deeper-rooted than those in countries that recovered more quickly. Today’s mess in America is as big as Japan’s—and in some ways harder to fix.
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