Friday, February 13, 2009

Following Japan's example

Today the NY Times had an article about how America is following in Japan's footsteps in creating a lost decade of economic activity by trying in vain to prop up failed banks and the housing market. While I agree with the premise, I have to take small issue with their conclusion, which was that the US wasn't throwing enough money away.

To wit, to quote from the article:
Only in 2003 did the government finally take the actions that helped lead to a recovery: forcing major banks to submit to merciless audits and declare bad debts; spending two trillion yen to effectively nationalize a major bank, wiping out its shareholders; and allowing weaker banks to fail.

Aside from nationalizing a major bank (which they probably felt they needed to do to keep lending subsidized), what did they do? Let's see, they:
- Forced banks to realize their bad debts and deal with the consequences
- Wiped out the shareholders of public banks which were insolvent
- Let insolvent banks fail

Hm... I would say I agree with the facts. If the US wanted to deal with the banking crisis without extending it into a decade long (or longer) depression, they should immediately cease all the bailouts, capital infusions, accounting shams, housing market subsidies, and other misguided attempts to "help", and just let the bankrupt banks fail! In short, the most direct, least painful, and most effective way to deal with the crisis is to do none of the things we are doing. The best thing the government can do for its economy is to provide a fair, free, open market; the worst thing it can do is to increasingly interfere, compounding the problem. Good job, guys.

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