Thursday, April 2, 2009

Too Similar to Japan

Twenty years ago, we were all scared that Japan would overtake America as the global economic powerhouse. Then, Japan underwent a sustained, decade-long recession. Interestingly, their recession was never devastating, but it did stop growth and halt Japan's ascension to the top-tier. Why?

Economists recognize that Japan prevented all-out crisis via extensive government intervention. But economists also recognize that Japan lost an entire decade to its recession because it refused to recapitalize its banks. Instead, Japan opted for a middle ground: the government overpaid for its banks' toxic assets. Thus, Japan prevented the utter failure of its banking system, but never had the guts to really solve the problem, which extended the recession.

Sound familiar? It should. America shouldn't be scared to take aggressive action. Otherwise, we might parrot Japan's lost 1990s.

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