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.
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.
There has also been talk of doing a huge infrastructure build out. The US isn’t in the same position as Japan, there’s a lot of old infrastructure that needs rebuilding. Nonetheless, the economic gains from traditional "roads and bridges" infrastructure is fairly minimal. Repairs are needed, but most places have enough.
Smart infrastructure build outs are what’s needed. That means no toll roads or bridges, since tolls reduce economic activity. It means public transportation, because that reduces the use of oil. It means a real telecom push, which requires less money than it does breaking up the telecom oligopoly. Another telecom revolution wants to happen. It can’t because the big telecom companies won’t let anyone do anything on their networks if they can’t take a share of the money. They need to be forced to allow anyone to buy access to their networks, just as phone companies were forced to allow ISPs and phone resellers to buy back in the 90’s. Furthermore, robust wireless networks should bracket all greater metropolitian areas, and that should not be done by the private sector, any more than roads should be owned by the private sector. High speed needs to become high-speed by international standards, rather than by backwards US standards.
Japan had some significant advantages when they went bust. They weren’t, for example, broke. They had a trade surplus, they had money put away for a rainy day, and so on. The US, on the other hand, finds itself with a huge trade deficit and a government budget deficit. Japanification may not work in the US. In fact, I’m pretty sure it won’t work.
However it is clearly being tried. It was clearly being tried 4 years ago, let alone now. The advantage of Japanification is that the rich get to stay rich, the powerful get to stay powerful and the status quo continues. Sure, the economy sucks and there’s no real hope of anything better. But it’s not collapse, and if you’re rich, it’s not a bad society to live in.
Even on its own terms, however, Japanification is not what Bernanke and the US’s elites should be trying for. For almost two decades the US has told Japan that it needed to clean up its banks, that it need transparency in loans and so on. As with giving personal advice, it was easy to say when it was someone else.
Now it’s the US. America can try and sweep this crisis under the carpet and pretend there isn’t a huge overhang of bad loans and worthless securities. If it does so, the best case scenario is that the next twenty years or so will be America’s bright depression. Best case.
What’s holding the US back are two things. The first is an unwillingness to admit the emperor has no clothes and that many firms are really bankrupt (and that the gravy train for your friends in the private sector needs to be ended). The second is an unwillingness to actually use government power to do anything but bail out private interests. It’s one thing to save the bankers and stock brokers from themselves, allowing most of them to stay rich. America’s elites understand that sort of action. But what really needs to be done, which is to bring insolvent firms under government stewardship and either wind them down or reinflate them, goes against everything the past thirty years has stood for. It’s just not the sort of thing neoliberals and neoconservatives, with their touchingly childlike faith in "free" markets, believe in, understand or can even seriously consider.
So, unless the tidal wave becomes too big, or Bernanke, who has become the man in charge of the US’s economy to an extent greater than any of his predecessors, wakes up in a sweat one morning, it’s Bright Depression, Ho!