Tuesday, January 22, 2008

Could The U.S. Be Headed For A Recession Similar To Japan's In The '90s?

Most people are familiar with what happened in Japan in the '90s. It even has its own name: the “lost decade.” This time represented one of the worst recessionary periods the world has ever seen. As the name explains, for economic purposes, an entire decade was essentially lost to this recession. During the recession, residential real estate values fell to 1/10 of their previous highs, and some office space fell to 1/100 of its previous levels. Is it out of the question to think that the U.S. might also experience something similar to Japan’s “lost decade?”

According to a recent article in The Wall Street Journal, “'Part of the problem is just not knowing,’ [University of Maryland economist Carmen] Reinhart says. ‘The longer the process of not knowing what the losses are takes, the longer the resolution takes.’ Japan was the extreme example, she says. Japan's inability to appropriately gauge the losses from the collapse of its 1990s real-estate and stock bubble led to a ‘lost decade’ of economic growth.”

But the same article also goes on to point out, “A critical difference between the U.S. and Japan is that the Federal Reserve has been cutting the target for its benchmark federal-funds rate and appears ready to cut it more deeply, whereas the Bank of Japan was still raising rates a year after Japan's bubble began to collapse. Also, Congress and the White House are both promising a fiscal-stimulus package, with Fed Chairman Ben Bernanke pushing for a plan that would help boost spending this year.”

In fact, in response to stock markets falling sharply worldwide because of fear of a recession in the U.S., the Fed made a rate cut of 0.75 percent this morning. This cut was "the biggest one-day move by the central bank in recent memory," according to the Associated Press.

Some of the same principles that drove the asset bubble in Japan--and subsequently the recession--are also apparent in the U.S., such as dramatic increases in real estate prices, and risky lending practices. However, it is probably too early to say that the U.S. is heading for a recession of this sort. It is likely that the looming recession will be more painful than ones in recent memory, but a recession of historic magnitude is probably a little far fetched, though not out of the question completely.

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1 comments:

July 11, 2008 at 3:04 AM UnsureBuyer said...

Interesting article... it's been about six months since you posted this. We're on the brink of seeing Fannie Mae and Freddie Mac going insolvent. We have strong inflationary pressures (wonder how long the Fed can keep this low rate). Job numbers have been disappointing. Merrill Lynch is mentioning the possibility of GM's bankruptcy.

I'm not sure that we haven't already begun a "lost decade."

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