After 15 years of sniffing condescendingly at the wimpy Japanese for nursing along their zombie banks and trying to spend their way out of their economic malaise, we're rushing headlong down the same road.
Two of our biggest banks are arguably insolvent, and two others appear headed that way. And yet Barack Obama and Tim Geithner refuse to even consider the possibility of temporary nationalization--a move that most economists agree is the quickest, most effective way out of this mess.
Paul Krugman nails it in the New York Times this morning:
[W]hile Mr. Obama got more or less what he asked for, he almost certainly didn't ask for enough. We're probably facing the worst slump since the Great Depression. The Congressional Budget Office, not usually given to hyperbole, predicts that over the next three years there will be a $2.9 trillion gap between what the economy could produce and what it will actually produce. And $800 billion, while it sounds like a lot of money, isn't nearly enough to bridge that chasm.
Officially, the administration insists that the plan is adequate to the economy's need. But few economists agree. And it's widely believed that political considerations led to a plan that was weaker and contains more tax cuts than it should have.
And then there's the banking "fix." Krugman's interpretation is more positive than mine, at least insofar as it leaves open the possibility that Tim Geithner might nuke a few banks. (Note that Krugman has now jumped aboard the rapidly growing bandwagon of economists who say temporary nationalization of Citi, et al, is inevitable).
The plan sketched out by Tim Geithner, the Treasury secretary, wasn't bad, exactly. What it was, instead, was vague. It left everyone trying to figure out where the administration was really going. Will those public-private partnerships end up being a covert way to bail out bankers at taxpayers' expense? Or will the required "stress test" act as a back-door route to temporary bank nationalization (the solution favored by a growing number of economists, myself included)? Nobody knows.
In fact, if we look in the mirror, we look at lot like Japan--a country that still hasn't regained its swagger 18 years after the bubble burst. (And in case you're feeling that our bear market is horrific, try theirs on for size: The Nikkei is trading at one-fifth its peak level of 19 years ago. The equivalent here would be DOW 3000 in 2026).
Overall, the effect was to kick the can down the road. And that's not good enough. So far the Obama administration's response to the economic crisis is all too reminiscent of Japan in the 1990s: a fiscal expansion large enough to avert the worst, but not enough to kick-start recovery; support for the banking system, but a reluctance to force banks to face up to their losses. It's early days yet, but we're falling behind the curve.