The Lesson of Japan

If like me you've heard our present situation compared to Japan's "Lost Decade" without really understanding what that means, this is a pretty good explainer:

Richard Koo, chief economist at the Nomura Research Institute, says the Japanese government implemented "one of the most successful economic policies in history."

Koo notes that when the real estate bubble of the 1980s burst, property values plummeted 87 percent from the peak nationwide. Counting the value of real estate and stocks, Japan lost wealth equivalent to three years' worth of gross domestic product. It was "just about the largest loss of wealth in human history in peacetime," Koo says.

Still, Japan wasn't in recession. While growth slowed, GDP never fell below the peak of the bubble. And unemployment never went above 5.5 percent — lower than the current rate in the United States.

The Japanese government tried to spur growth by reducing interest rates — from 8 percent to zero. But despite that drastic action, Koo says, "absolutely nothing happened — no increase in asset prices, no increase in economic activity."

[...]

Like Japan in the 1990s, the U.S. is suffering what Koo calls a "balance sheet recession." When asset prices collapse, the people who bought those assets with borrowed money are left with balance sheets underwater, and all they want to do is pay down debt.

"People are no longer maximizing profits the way it's assumed in economics. They're minimizing debt. The invisible hand of [economist and philosopher] Adam Smith works in the opposite direction," he says.

With private borrowing and spending frozen, the Japanese government stepped in, spending on highways, bridges and other infrastructure, and running up big deficits. Where the Japanese government erred, Koo says, was in worrying about those deficits. It cut back prematurely on the stimulus. The economy faltered, and the government had to resume spending.

Global Markets Fall

If you were hoping to wake up to some good economic news (or at least, no bad news)...well:

Global stocks plummeted Friday after the rout a day earlier on Wall Street, where the Dow Jones industrial average lost more than 7 percent, and investors were looking to global financial authorities meeting later in Washington for new measures to stem the turmoil.

“We are fighting really dire fundamentals,” said Gerhard Schwarz, an equity strategist at Unicredit in Munich. “It will require restoring trust and confidence before a sustained rebound will be possible.”

European markets fell more than 10 percent at the opening, but came off their lows a bit later. In early afternoon trading in London, the FTSE 100 index was down 7 percent. In Paris, the CAC-40 was 8.2 percent lower, and the DAX in Frankfurt was down 8.7 percent.

Shares in Asia also declined as fears continued to spread that a deep global recession is at hand, despite unprecedented steps by policy makers to defuse the financial crisis. As the urgency grew, finance ministers and central bankers from the world’s richest countries were gathering for a meeting in Washington, and President Bush was due to make a statement on the crisis at about 10 a.m., Eastern time.

“It is a must for the G-7 countries, especially the U.S., to make a firm commitment to public fund injections for recapitalization of banks in trouble, in order to see the stock market pull out of the doldrums,” Hideyuki Suzuki, an analyst at Morningstar Japan told Reuters. “If the G-7 nations failed to do so, its raison d’être will be called into question for sure.”

Japanese Finance Minister Shoichi Nokogawa will propose at this weekend's G-7 meeting a joint global fund to make emergency loans to nations hit hardest by the crisis. The greatest fear is that the crisis in confidence that has infected the global markets would lead banks to stop lending from each other. This in turn would essentially freeze the commercial paper market, thus preventing business from getting short-term loans they need for daily operations and wreaking untold havoc on the economy. Moves by the Treasury Department and the Federal Reserve have perhaps slowed this process, but they have definitely not stopped it.

UPDATE: Developments on this scale have even normally sober economists wondering if there are things we need to do to prevent something like the Great Depression from happening again.

UPDATE II: Reacting to the bad day of trading overseas, the Dow is already down 400 points this morning.

Random Hint of the Day

Don't learn Japanese from your Japanese girlfriend.

House Passes Major Lobbying and Ethics Overhaul, Other Measures

On the heels of an bribery investigation into Republican Senator Ted Stevens, the House today passed a lobbying and ethics bill , 411-8, sending it to the Senate for final action. Senate Majority Leader Harry Reid was expected to file a cloture motion later Tuesday on a motion to call up the House-passed measure, according to CQPolitics.com: "Because the measure would change Senate rules to require disclosure of earmarks and their authors in appropriations, tax and tariff measures, Reid will need two-thirds of those present and voting to invoke cloture and limit debate. Democrats hoped the huge House vote would lend momentum to the bill in the Senate."

The measure would require campaign committees to disclose bundled contributions sent to them by lobbyists and others every six months and strip pension benefits from members of Congress who are convicted of bribery and other crimes related to their official business. Senators would be barred from lobbying former colleagues for two years after they leave office, but the bill would maintain the current one-year cooling off period for House members after they leave office. All earmarks in tax, tariff and spending bills or conference reports, and their sponsors, would have to be disclosed on the Internet at least 48 hours before Senate votes. Provisions added in conference at the last minute — so-called “dead of night” provisions — would have to receive 60 votes in order for the conference report to survive challenges on budget points of order.

If the Senate passes the bill on Thursday, this becomes the third major legislative victory for Democrats so far this year after the minimum wage increase and implementing more of the 9/11 commission's security recommendations.

The House also passed bills that call on the U.S. government to list companies with more than $20 million invested in Iran's energy sector or with business in Sudan supporting the genocide. Money managers who decide to divest from companies on the lists would also be protected from lawsuits. The Iran bill was approved by a 408-6 vote, the Sudan bill by 418-1. The White House opposes the measures, but they are clearly veto-proof. Similar bills pend in the Senate.

Lastly, the House voted to nullify the recent Ledbetter ruling by the Supreme Court, 225-199, by allowing workers to sue for wage discrimination long after a deadline the court imposed. The White House has threatened a veto.

The House of Representatives is set to debate and possibly vote on the bill this Friday (just before lawmakers leave for their month-long summer recess) on energy legislation that requires home appliances to use less energy, imposes green building codes and cuts billions of dollars in subsidies to oil and natural gas companies. The bill would need to be reconciled with the Senate version. Meanwhile, the Senate's Environment and Public Works Committee approved a bill, 10-9, that would require the EPA to act on a California request for a waiver allowing it to implement a 2004 state regulation designed to reduce emissions from automobiles. "The state rule would put into place a major state-level climate change program, even as Congress is still debating whether to pass federal legislation. Several other states hope to issue rules identical to California’s if the EPA grants its approval."

On Monday, the House passed a resolution urging Japan to apologize for coercing thousands of women to work as sex slaves for its World War II military and also passed four bills designed “to improve counseling and care for the tens of thousands of military personnel returning from Iraq and Afghanistan with brain injuries and post-traumatic stress disorder.” That legislation now goes to the Senate.

Last Thursday, the Senate Finance Committee voted 20-1 to give the U.S. government new tools to press China to raise the value of its currency. The Bush administration said it opposed the bill, but the overwhelming vote shows Congress is headed toward passing legislation by a big enough margin to overcome any presidential veto. The House still needs to consider the bill.

Finally, three Senators are proposing a bill to establish a regional primary system for presidential elections that would take effect in 2012.

UPDATE: FBI-raided Sen. Stevens is threatening to block the ethics bill in the Senate, according to The Politico. You just can't make this stuff up.