"What does this betoken?
- Posted by:
- Economist.com | WASHINGTON
- Categories:
- Financial markets
IN A piece mentioned in yesterday's Link exchange, Keiichiro Kobayashi wrote the following:
Only after Resona Bank had been temporarily placed under government control, the IRCJ had been established, and Japanese banks had embarked on an all-out effort to dispose of bad loans, did stock prices finally pick up and people come to embrace the recovery. Up until then, whatever measures had been taken by the government — whether bank recapitalization or pork-barrel fiscal spending — did nothing but provide temporary pain relief.
My response to this line of argument is this:
The connexion between flailing banks and economic weakness isn't as clear as is often asserted. Some researchers have argued that Japanese household debt was the real source of the lost decade, which isn't encouraging for America but at least suggests a different policy tack. Mr Posen also notes that the Japanese economy began to take off in 2002, when it got serious about fixing the banks. But that also happens to be when Japan's recent export boom began.
This sets up an interesting challenge to Paul Krugman. You see, Mr Krugman made the export argument I cite above. But Mr Krugman also points to Japan as a case where a zombie banking system produced a lost decade. These seem like conflicting beliefs. And today, in a post that floored me, Mr Krugman resolves the issue:
I have a problem. You see, it’s hard, looking at the data, to see much role for bank reform in Japan’s recovery, such as it was...
A first read would be that recovery came from an export boom, which in turn fed a modest increase in consumption — full stop. What did banks have to do with it?
Gah! I mean, how to square this with his relentless attacks on the Obama administration's approach to the banking system? I can see how this outlook would justify a push for more stimulus—as he says, the whole world can't export itself out of recession, and the demand has to come from somewhere. But if anything, the above suggests that Mr Krugman should be arguing against any relief to banks at all (or for the minimum necessary to prevent a systemic meltdown), rather than for—in no uncertain terms—nationalisation."
Me:Don the libertarian Democrat wrote:
I went back and looked at his original post, in which his main point was that we were in trouble because we couldn't export our way out of our crisis as Japan did. From his chart, I suggested an increase in investment. For example, using targeted tax cuts to increase investment. Since, unlike your blog, his blog doesn't post all comments, I didn't get to raise my question.
But the question remains: Wouldn't more investment help? Or am I misunderstanding his chart?
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