Seattle Bubble Forum Archive

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Ben Bernanke's Federal Reserve increasingly looks like it's headed toward a repeat of the errors that took Japan into a decade-long banking crisis and economic slump, beginning in the early 1990s.

Welcome to the United States of Japan, where growth slows to a crawl, the stock market goes nowhere and savings earn nothing. Just in time for the retirement of the baby-boom generation, too.

Japan's crisis, like the recent one in the United States, began with an extraordinary real-estate boom. In 1987, the price of land in Japan's three biggest metropolitan areas climbed 44%. Prices went up 12% more in 1988 and then 22% in 1989.

And like the U.S. real-estate boom, the Japanese boom was fueled by cheap money. The Bank of Japan, that country's Federal Reserve, had lowered the discount rate -- the rate it charges other banks -- to a post-World War II low of 2.5% from 5% in 1984-87. In those same years, the money supply grew by better than 10% a year......

But what else is the Fed supposed to do? Any Central Banker worth her salt would keep dropping interest rates during economic contractions until the decline stopped. The fact that the contractions don't necessarily stop once interest rates hit 0 is beside the point. That's like saying there is no point in attempting to perform CPR on someone who just stopped breathing even though they might die anyway because their underlying problem results from a stroke rather than heart failure.

I think central bank actions just confuse the issue. The Japanese central bank didn't make "mistakes" which caused their lengthy recession. Likewise, the comming recession will play out no matter what the US Federal Reserve does (raising rates, lowering rates, whatever).

I am not suggesting the Fed should continue it's policy of lowering rates, I am merely pointing out that what it does is irrelevant in the broader picture.

Sniglet,

Why does dropping the rate help the economy? This isn't your traditional economic slowdown. The problem is not that the economy needs more cash, the problem is that there are a bunch of toxic loans clogging the system up. The Fed needs to raise rates, flush the toxic loans out of the system, and do their job as regulators.

As part of their mandate the Fed Reserve is supposed to be overseeing the financial system. They haven't, and continue to do nothing from a regulatory point of view. Cutting rates merely delays this problem for years to come, instead of getting it over with painfully and quickly.

I agree that cutting rates won't help the economy right now. But I don't think it hurts either. The rot in the credit system isn't going to be ameliorated by lowering central bank interest rates. I just don't see how the Fed decision to lower rates makes anything any worse. Lower rates won't even delay the recession.

Did you read the entire article? Jubak does a good job of explaining why cutting rates is going to hurt. Instead of writing down all of their losses in a quarter or two, banks are going to hope that the Fed keeps cutting rates more and more, in the hopes that if they cut enough, they may not have to writedown all of their losses. This is going to postpone the inevitable writedowns for years instead of quarters.

Just like Japan...........

Snig,

Rather than CPR, consider our financial duress to be like poison. Each poison requires a different solution, and performing the wrong procedure can cause more harm that good.

The Fed's goal should be the long term financial stability of the nation. It should not be to bailout Wallstreet, or banks. If Jubak is right, the Fed is sacrificing long term financial stability for short term stability. Imagine baby boomers who are counting on 7% annual stock market gains if they intend to retire, but instead see 1% annual gains for the next 15 years. This is a really big deal, and the Fed is messing it up right now.

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The US could be facing a "lost decade" like that suffered by Japan in the 1990s as the markets fail to respond to interest rate cuts and the US Federal Reserve runs out of options, the head of one of the leading private equity firms said today.

Tim Collins of Ripplewood Holdings, said the Fed was "running out of policy alternatives" as it attempted to prevent a long recession in the US.

Mr Collins, whose firm has significant expertise in Japan after leading the buyout and turnaround of Japan Telecom, said he believed a "sharp repricing of assets" was the most likely outcome.

But he said: "My fear is that we will prolong it and suffer a death of a thousand cuts after we have exhausted all the options."

"Even without a recession and with all of the policy tools available we still have hundreds of billions of dollars of losses."

Japan has only recently emerged from a period of zero interest rates.

He said the future would not be clear until a recession had laid bare the true state of the financial system. "You have to wait for the tide to go out to see who is wearing a bathing suit," he said.....
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