Fixing the Credit Crisis is More Important then the Stimulus Spending:A Lesson From Japan
Tonight in his first Presidential new conference, Obama made reference to Japan’s “Lost Decade” which refers to 1990’s where they suffered a severe recession. The Japanese government and banking response to the fiscal crisis is probably more relevant to understanding the current situation in the United States than the Great Depression of 1930’s.
Some experts such as former General Electric CEO, Jack Welch, are saying we are paying too much attention to increasing government spending and the deficit (Keynesian economic theory) as the answer to the current fiscal crisis instead of making Monetarist policy (credit stability) the major focus.
The current situation in which the world finds itself is very similar to the economic crisis that developed in Japan in the late 1980s. Their economy came to a screeching halt and unemployment rose to high levels despite the Japanese banking authority reducing the interest rate to zero. Economist Paul Krugman at that time described the situation as a “liquidity trap”.
The Japanese situation was the focal point of embroilment between “supply side” economic proponents and more traditional Keynesian economists who recommended increased government spending. For several years the Japanese dumped billions into infrastructure projects like roads and bridges which helped for a few years but then the economy began to sour again. Many saw this failure of Keynesian theory to help the Japanese economy as a sign that tax cutting policy and supply side measures were a better approach to recession.
The foremost proponent of the Democratic initiatives is the Nobel prize winning economist and writer for the New York Times, Paul Krugman. He proposes that the there should be a massive government spending program much larger than even the trillion dollar program which passed the House of Representatives.
No one can doubt Professor Krugman’s expertise but he is also admittedly politically progressive in bias. Examination of his writings over the years about dealing with specific issues are not always consistent. For many years Professor Krugman has felt that consumer spending was the engine of American economy. In 1999, he wrote that it was good for consumers to “outspend themselves” because it helped producers and advocated minimal savings for the average American. Eventually he conceded that might have to change because it might not be sustainable but did not encourage it. Many would argue that lack of saving and excessive expenditures ultimately were the cause of the housing crisis by encouraging consumers to put down too little credit for a house they should not be able to afford because of this spending binge that zealots like Krugman supported. In 2005, Krugman lamented that the American government was a “can’t do” government and implied that reliance upon government run programs was an unwise course of action.
Today in the New York Times, the Professor wrote a column about how the Senate version of the stimulus package was too small but when compared to an article he wrote about the Japanese economy in February of 2000 there are inconsistencies. At that time he wrote that massive government spending had not brought about a self sustaining economy ( and admitted that he had expected it would help). For the long term he felt the deregulation and breaking up of monopolies would be helpful but for the short term he recommended experimentation in expanding the money supply. Up to that time the Japanese government had been reticent to do more than lower interest rates in banking policy. No action was directly taken to resolve bad loans or bank insecurity.
Japan did not see improvement until 2003 after strict bank auditing and bank regulation had been established. Many experts believe that slowness in dealing with bad credit and re-establishing the credit system contributed significantly to the delay in the Japanese recovery. It was the reestablishment of the credit system and not massive government spending that ultimately helped Japan.
The United States solution to our economic crisis is the first time a combination of Keynesian (government spending) and Monetarist policy will be tried together. Much of the message we are hearing from the press and politicians seems to be stressing the importance of government spending as the main solution but it may be that in reality what will ultimately determine our recovery as it did for Japan will be what we can do about monetary policy and establishing credit.
The President and the Congress need to make the disposition of the “toxic assets” (bad loans) and the availability of credit to business and consumers their first priority. Instead of wasting a week in Congress bickering over spending a trillion dollars needlessly on a “stimulus” they need to make sure that the TARP (Troubled Asset Relief Program) system is administered to quickly establish a credit system otherwise we will be repeating the same failures as the Japanese.
Poor communication and administration of the TARP program to date have inspired little public confidence. Expending political capital and excessive financial resources on government spending instead of the TARP may cost the nation’s economic recovery. The current TARP program was configured improvidently with no set specific goals or means of measuring performance, Congress and the Administration need to spend their time and resources to change this Pandora’s box into a functional entity. Our government leaders need to put much more transparency in the TARP program and more face time to the public explaining it. The government stimulus program was really more of “front’ to excuse entitlement spending for the purposes of “buying” partisan re-election then helping the economy.
Tonight the President was hesitant to say how much money will be needed for TARP program when a reporter asked if another trillion dollars would be necessary. Perhaps this is why he has agreed that the Congressional stimulus package should be limited to about 800 billion because he knows much more is going to be requested for the TARP. In retrospect perhaps it would have been better had the President had this news conference before the Congress took action on the economic recovery package. They should have meet and decided upon what to do about TARP before they talked about a stimulus package.
Tony Magaña grew up in McAllen Texas, attended Texas A&M University, served as an officer in Army Reserve, and holds a doctorate from Harvard University. The co-founder of Contempo Magazine has participated in Valley business for over 20 years.He is a member of the National Association of Hispanic Journalists.
