Stocks Soar, But What Does It Mean?

The Wall Street Journal reports:

At about 2:10 p.m., the Dow Jones Industrial Average was higher by 252 points, or 3.3%, after climbing over the 8000 mark for the first time since Feb. 10. Over the last four weeks, the Dow has tacked on 21%, its best four-week rally when all four weeks have finished in positive territory since May 1933.

The S&P 500-stock index climbed 3.4%.

This is, of course, great news! But what does it mean? It all goes back to Japan.

In this post, I made the argument that the Fed is doing too little and therefore runs the risk of (softening, yes, but) prolonging the recession. As I noted, Japan has been widely criticized for unnecessarily extending their '90s recession by taking a series of half-measures, and we appear to be mimicking Japan's mistakes.

I fear that the public will look at our recent economic stabilization and reject additional rescue measures, resulting in the half-measures employed by Japan. We should remember that one month of improvement doesn't a recovery make.

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.