A Bright Shining Depression

"In Japan they call it the Bright Depression. Ever since the 80’s bubble burst the Japanese economy has never been able to rev up its engines and roar again. Slow growth or small contractions have been the rule. It hasn’t been awful. It hasn’t actually been a classic depression. But, somehow, the good times have never come back. Unemployment, never previously a problem, just won’t go away. The opportunities, the bursting optimism and the glory days are gone. It’s been a long time since anyone wrote a book or article claiming that Japan was the future, but those of us who are old enough remember when everyone was frightened that Japan would eat America’s lunch.

"What happened in Japan should be of interest to every American, because it’s one model for what’s been happening to the US, and what will happen to it. For over 5 years Stirling Newberry and I have used it, and it’s proved itself over and over again. Japan’s collapse, remember, was based on a real-estate bubble. Some details were different and due to the geography of Japan, it was much more concentrated, but the run up in prices was very similiar. At the height of the Japanese real-estate bubble, the value of Tokyo’s land was more than the value of all land in the entire rest of the world put together.

"Ouch.

"When Japan’s economy collapsed the reaction of the central bank and government was interesting and in the broad details, very similiar to the US one. First, Japan did not have its banks come clean on all their bad loans. Banks were kept alive by any means possible, with bad loans staying on the books for years. Major banks were not allowed to go bankrupt, even if they were insolvent.

"Second, they engaged in a huge bit of Keynesian stimulus, pumping money into infrastructure in an attempt to increase demand, something that is being talked up now in the US. It didn’t work for Japan because Japan already had plenty of infrastructure so there was very little economic activity to be enabled by improving infrastructure.

"Because Japan never cleared the books, its banks were heavily impaired when it came to lending new funds to businesses and consumers. When you’re technically insolvent, there just isn’t a lot of money to go around.

"The same thing is happening in the US. Bernanke has bailed out the banks and the brokerage houses, essentially declaring that he’s nationalizing their losses (when you take paper banks can’t sell for 99 cents on the dollar, it isn’t "collateral"). Bear Sterns may have gone under, but its debt was not allowed to be unraveled on the open market. Allowing that would have forced other banks and brokerages to value their bad paper at actual market values, and that would probably have pushed them from insolvent to bankrupt.

"Bernanke’s got his reasons, and they aren’t necessarily bad reasons, but the fact remains that the US now has a very impaired financial sector. Credit limits on people with good jobs and credit ratings are being slashed, there is less money to be had for business loans, and banks are having trouble raising new funds, because as Hale Stewart points out, their stock prices are crashing and why would you want to give them money for shares when those shares will be cheaper later?

"If the US refuses to cull the flock and let some banks go under, probably by putting them into government receivership, since the government’s going to have to bail them out anyway, then it could take a couple decades or more to regain a functioning financial sector. And while a lot of what financial companies did was froth, and counterproductive to the purposes of the actual economy, they also do things that are necessary. If they can’t do those things—make those loans, then the US will suffer."

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Millions of Unemployed Face Years Without Jobs

"Even as the American economy shows tentative signs of a rebound, the human toll of the recession continues to mount, with millions of Americans remaining out of work, out of savings and nearing the end of their unemployment benefits.

"Economists fear that the nascent recovery will leave more people behind than in past recessions, failing to create jobs in sufficient numbers to absorb the record-setting ranks of the long-term unemployed.

"Call them the new poor: people long accustomed to the comforts of middle-class life who are now relying on public assistance for the first time in their lives — potentially for years to come.

"Yet the social safety net is already showing severe strains. Roughly 2.7 million jobless people will lose their unemployment check before the end of April unless Congress approves the Obama administration’s proposal to extend the payments, according to the Labor Department."

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