How the U.S. Financial Crisis Resembles Japan’s 'Lost Decade' - And How to Play it

If you think the "Lost Decade" Japan endured during the 1990s was deep and painful, stick around: As the global financial crisis that was jump-started by the meltdown of the subprime mortgage market continues to unwind, the U.S. economy is headed for a financial Ice Age that will make Japan’s 10 wasted years seem like a single chilly night.

The two meltdowns started in much the same way - with busted stock-and- real-estate bubbles. With both the United States and Japan, the market manias were ignited by laughably loose credit policies, smoldered under a lack of oversight from government regulators, market analysts or such private-sector sentinels as credit-rating agencies, and were finally fanned into a frenzied financial conflagration by the promise of easy profits.

Americans are already getting financial frostbite. Unemployment is 20% higher than it was a year ago. Zooming meat, dairy and gasoline prices are eviscerating household budgets, meaning that the "real" rate of inflation is probably double or triple what the federal government would have us believe. Mortgage defaults are at their highest level in 30 years. Home prices have fallen so much that they’ve wiped out all the gains of the past four years. And U.S. stocks have eradicated a decade’s worth of profits.

That’s all bad, of course. In fact, it’s downright awful. But here’s the problem.

It’s going to get worse. Much worse. And here’s why.

Anatomy of a Lost Decade: Japan

Just look at what happened in Japan. Success in the export markets - coupled with a strong tariff policy that protected the home market from imports - pumped up the yen and led to a massive buildup of cash in both Japan’s corporate coffers and among its consumers. That spawned an era of easy credit, and that fueled a frenzy of stock-and-real estate speculation unrivaled since the U.S. Great Depression.

Almost overnight, the newly wealthy Japanese were viewed with fear. Americans talked about the invincible "Japanese superman," an unstoppable juggernaut who never made mistakes. Japanese cars filled American roadways, Japanese cars filled American roadways, and Japanese-owned companies treated the U.S. market like it was a private rummage sale. Suddenly, Universal studios, Columbia Records, Rockefeller Center and the Pebble Beach golf course (with its lonely cypress tree) all had new ownership.

U.S. lawmakers sounded the alarm. And so did the news and entertainment media. Fortune magazine carried a piece entitled "Where Will Japan Strike Next?" And author Michael Crichton’s alarmist book, "Rising Sun," was made into an equally alarmist - but no less fun to watch - feature film that starred Sean Connery and Wesley Snipes.

At the height of the insanity, Japan boosters regularly claimed that the land beneath the Imperial Palace in Tokyo dwarfed the value of the entire state of California - an argument that defied reason, and yet could be substantiated mathematically with actual market values. In 1989, in Tokyo’s Ginza district, prime office space was going for $139,000 a square foot.

On Dec. 29 of that year, the Nikkei 225 Index topped out at 38,957.44, before closing at 38,915.87. By the following September, it had nearly been halved - and there was still much more bloodletting to go (despite several subsequent rallies up over the 20,000 threshold, the Nikkei ultimately bottomed at 7,830 in April 2003. It closed yesterday - Wednesday - at 12,760.80, still down 67% from its trading high 19 years ago).

The fallout from that meltdown was incredible. By early 2004, houses were selling at 1/10th their peak value, and commercial real estate was selling for less than 1/100th of its peak-market value. All told, an estimated $20 trillion in stock market and real-estate wealth had been vaporized (although one could easily argue that the peak values weren’t real to start with).

As horrific as the damage Japan suffered through that damage sounds, here’s the thing: The U.S. financial crisis is much, much bigger, and the resultant "Lost Decade" is arguably going to take much longer to work through.

What’s the holdup, you ask? Believe it or not, we expect any recovery to be long and needlessly drawn out largely because of the U.S. Federal Reserve, which is the very same culprit that created much of this mess in the first place.

The Lost Decade - American Style

A dangerously inflationary monetary policy by the Fed fueled two massive U.S. asset bubbles - stocks in the latter half of the last decade, and housing in the first half of this one. If you argue that the beginning of the looming Lost Decade for the United States was very different than Japan’s, we’ll counter and say that you’re wrong.

You see, both were spawned by a massive overflow of liquidity. True, Japan’s was created naturally, with a mass of cash from savings that lead to a period of easy credit. And we all know that U.S consumers are lousy savers, meaning that couldn’t be the catalyst here. But that’s okay. Under Messrs. Alan Greenspan and Ben S. Bernanke, the Fed did that for us artificially - holding rates at ridiculously low levels, even as it continued to stoke the money supply. Despite the different routes the two markets took, the result is essentially the same.

Cheap money drove the Internet boom-and-bust. Cheap money fueled the run-up in housing prices - and induced the U.S. banking system to create "subprime" mortgages so it could reach a bigger pool of potential "customers," and boost its potential profits. All those extra customers flogged home prices, which drew in an even greater number of potential buyers, this time in a group interested in buying second homes as "an investment."  Of course, that pushed home prices up even higher.

All the money flowing in from these mortgage payments (many of them the "no money down"/interest-only variety) forced Wall Street to create all sorts of new asset-backed securities, snipping the mortgages into pieces much like a coupon-clipping consumer used to cut up the Sunday newspaper.

We’ve already talked about how the financial-crisis fallout has pounded U.S investors and consumers in guise of plummeting asset values and spiraling prices (inflation) in the face of a stagnant - or even stagflationary - economy (rising unemployment and rising inflation).

Just as we’ve been predicting since Money Morning’s earliest issues last year, the financial crisis is already transforming the United States into the World’s Biggest Garage Sale. Japan faced a similar ordeal, having to dump off virtually all the trophies it had grabbed during its artificially created salad days.

Foreign-government-controlled sovereign wealth funds already are investing billions in some of our choice companies. And they’re making their moves with an almost-surgical shrewdness: They’re snapping up financial firms that possess key competencies, are buying into such strategically positioned ventures as stock exchanges, and in some cases are clearly willing to send good money after bad to learn the art of financial deal making that America once dominated - because we were once so good at it.

Dubai just spent $800 million for a 90% stake in New York’s vaunted Chrysler Building - the first in what figures to be a long line of "trophy" purchases by foreign buyers. Trust me when I say you’ll be able to watch as the sovereign- wealth heavyweights from emerging Asia and Europe, the Middle East  - or cash-laden China, with its $1.68 trillion in foreign reserves - begin to snap up high-profile U.S. properties.

But when you’re the United States - and are constantly spending more than you make in the form of the twin deficits of budget and trade - you have to finance your shortfall somehow. And you do that by selling off your best assets to your overseas creditors.

The 'Lost  Decade' vs. A 'Lost Coupla Years'

Here’s a little secret. Just as Japan didn’t have to waste the better part of 15 years in the financial equivalent of a locked-room mystery that can’t be solved, the United States doesn’t have to endure 10 years of wasted time, missed opportunities, and watching countries such as China, India, Brazil and others start to put some real distance between us.

But it’ll probably happen anyway. In fact, the longer we wait to take action, the more inevitable it becomes.

Look at it this way. Back in the late 1980s and early 1990s, the United States went through a savings-and-loan crisis right about the same time Japan endured the beginning of its banking-and-stock-market crisis. Today, however, the S&L crisis is hardly a blip on U.S. memories, while Japan’s Lost Decade is now part of global financial lore. The reason for this big disparity is simple: We attacked the S&L industry with great energy, shuttered or sold off ailing thrifts, and decisively enacted new guidelines to avoid such problems as under-funded state insurance pools, lousy capital requirements, and major regulatory loopholes.

Japan did nothing. It refused to acknowledge the breadth and depth of its problems, partly because banks are part of complex, societal cross-linking arrangements known as keiretsus. And because taking action would force it to admit it had handled this sector poorly. By the time Japan finally realized it had to take action, the problem was so ingrained and the losses had ballooned so much that it was too late for decisive action - only time and long-term policy changes could bring about the desired conclusion.

This time around in the United States, the Fed opted for the "prop it up" pathway instead of the decisive route. Think about it. When the subprime crisis broke, instead of permitting the free markets to fix the problem, the Fed embarked upon on of its most aggressive rate-cutting campaigns ever, and slashed borrowing costs at a time when it probably should have been raising them.

Then it set a dangerous precedent when it intervened in The Bear Stearns Cos. (BSC) case, setting up a bailout-and-sale deal with JPMorgan Chase & Co. (JPM). When Fannie Mae (FNM) and Freddie Mac (FRE) came around, the Fed was almost obligated by that precedent to bail these two mortgage giants out - not necessarily the best position to be in when additional failures (such as the Federal Housing Administration, or FHA) are in the offing. Indeed, investing guru Jim Rogers calls the Fannie-Freddie bailout an "unmitigated disaster."

For some perspective, consider this: This bailout adds $6 trillion to the U.S. debt load - a liability that’s equal to nearly half the value of the output from the U.S. economy for an entire year.

(In his recent "Inside Wall Street" column, Money Morning Contributing Editor R. Shah Gilani makes an excellent argument that the bailouts of Fannie and Freddie, though as undesirable as we say, still were probably necessary and certainly were the only valid exceptions to the "no-bailouts" argument. He details the FHA predicament in another "Inside Wall Street" report).

By slashing rates, pumping up the money supply and rescuing poorly managed enterprises, Fed Chairman Bernanke has essentially thumbed his nose at the free-market system, as if to say the central bank can do it better. Financial markets are remarkably resilient. If financial ventures are so poorly run that they’re poised to fail, the free-market doctrine says to let them do so. The pain will be deep, and will certainly have a broad ripple effect, but in the end the marketplace will have flushed the poorly run venture away, freeing up capital that well-run, opportunistically rich companies can use to grow and create jobs.

Instead, Bernanke and Co. have stepped into the fray in such a way that the virtually assures the United States of a Lost Decade of its own. The artificially low interest rates the Fed has employed to avoid the financial pain from the crisis will continue to put an intense downward pressure on the U.S. greenback. And that, in turn, will fuel additional run-ups in food and energy prices - inflationary pressures that will prolong the U.S. economic malaise for months or even years to come.

Just how long will it last? Opinions vary.

 

Buyout specialist Theodore "Ted" Forstmann, the chairman of IMG who was one of the players in the "Barbarians at the Gate"/RJR-Nabisco saga, recently told The Wall Street Journal that this financial crisis still has a fair distance to run.

"We are in a crisis the likes of which I’ve never seen in my lifetime," Forstmann said. "The credit problems in this country are considerably worse than people have said or know. It’s hard for me to believe that it gets fixed without an upheaval in the financial system. Things are going to fail. Enterprises are going to fail. The economy is going to slow … I think we are about in the second inning of this."

In response to that prediction, noted Contrarian Investing columnist Bill Fleckenstein recently related the prediction of a trusted industry source that he refers to as "The Lord of the Dark Matter," who admitted that he didn’t know what inning the financial crisis was in - although he was certain it was going to be a double-header.

We couldn’t agree more.

 

Continue to Part II.

Original post

Comments

[iThinkBig]

We'll lose about 5 years between elections as the socialist will stay in power until the American public throws them out. More socialism, more taxes, more inflation. Then in 2012 some new, more responsible grop will come into Washington. Add a couple years from there to create responsible policy and deploy it. What's that, about seven years? Next start of the bull run probably 2013.

[Things ComeUndone]

In order for the Fed to fix the problem Ben would need to look at everybody's books right now nobody trusts any numbers they hear on financial companies so the good and bad are getting hit.

[Things ComeUndone]

This is Crony Capitalism socialize the pain when the Cronies are connected. But notice the benefits if there are any will never be socialized.
In a sense the middle class will bail out the rich. The only people who stand to lose a lot of money as a percentage of assets are those who did not have a diversified portfolio in the first place.
The Social Darwinism of the Connected seems to be reverse Natural Selection those who make bad choices are protected from there mistakes by those who made good choices.
How will such actions change our society?

[Emerald]

"iThink": Perhaps you're right. However, the big boys on Wall Street and their lobbyists have just been given another free pass with the "no naked short selling" for a small list of insiders. They will rollover the bubbles into infrastructure & energy, now that their losses are socialized and risk mitigated by the Fed and SEC. AS they say, "It's a wonderful world afterall!" Look for big FDR type programs to fix roads bridges, pipelines and cable to carry natural gas and wind power with bonds floated by Wall Street and guaranteed, in one form or another, by you and me. So who needs to travel to Europe or Asia ever again as the dollar slowly shrinks. Personally, I like infrastructure (ABB, EMR, ACGY, JEC, HSC), oil (CVX, COP) and drillers (DVN, CHK, CAM) and maybe some steel plays. Don't forget the energy MLP's for income and, of course, own GLD to protect from the Bernacke flu bug. I'm long all the above and hope to survive. My flyer: buy money center banks for tremendous upside in three years (C, BAC, JPM, CS). Also long AIB and LYG. Buy the Buffett way: when others are fearful.

[San_Fran_Sam]

Now would that be your Democratic Pary socialists or your Republican Party socialists?

[MuddlingInvestor]

This article misses couple of points.
1. Nikkei PE in 1989: 57. S&P PE now: 16.
2. The main problem of Japan in the beginning of 1990s was that they allowed money mass contraction. I hope that Bernanke, who actually wrote a book about Japanese Great Depression, won't allow it here. At least not much.

Japan in 1990s fell into classic deflationary spiral. Markets don't have cure for it, at least no short-term cure. When Japan Central bank started printing money like crazy, this money went into savings and into yen carry trade, instead of increasing consumption. Hence the results.

[MuddlingInvestor]

I also want to add that apart from being wrong, this article doesn't provide what it promised: "How to play it". If parallels with Japan hold even a little bit, dollar carry trade is a way to go!

[Whidbey]

What we are missing here are the implications for the political processes of the USA which is the heart of our economy.Free markets are the life blood of a society. Without economic freedom, there is no political freedom; one powers the other.

I believe, as the author says, that we will suffer a great deflation which will essentially cripple the political system and allow a man on horseback to take the government away from the voters and with it the free market.

National socialism will be a by-product of the suffering since the security/efficiency of government will depend on controlling the total of society and the economy. Totalitarian control very like the National Socialist Party in Germany is the likely end point. We know the path, but we don't know how to avoid it. Ben B is likely to fight the recession and destroy the dollar in the process. (The GSE bailout plan is the first step to state socialism taking control of the economy). How to fight it? You can not.

Move and take your money with you. Better to see the end from a far shore than perish in the destruction.

[ozzy43]

"Then in 2012 some new, more responsible grop [sic] will come into Washington."

Well, that certainly would be a first. In the last 150 years of our history, I think that happened once...no wait, was mistaken. Never did. They were all politicians just like the idiots there now.

Trying to tie this cataclysm on one political party is grotesquely absurd, and completely misses the point to boot. As the author makes clear, this scenario was *decades* in development and both parties (which in the end represent precisely the same thing - Statism) bought into it and played along. Their friends are not getting hurt, just we taxpaying peons.

Fantastic article - those who do not remember the past are indeed doomed to repeat it, as Santayana said. And Americans as a people have zero sense of history, or of how directly it impacts them. Which of course is why we've consistently voted for imbeciles from both sides of the aisle, and which is why America deserves what it's about to get, sad to say.

[ozzy43]

"2. The main problem of Japan in the beginning of 1990s was that they allowed money mass contraction. I hope that Bernanke, who actually wrote a book about Japanese Great Depression, won't allow it here."

Just what do you think the credit crunch is? Where do you think money comes from anyway? The vast majority of it is created out of thin air when loans are made. Credit crunch = massively fewer loans = mass money contraction.

[ozzy43]

"Move and take your money with you. Better to see the end from a far shore than perish in the destruction."

You may want to check out the Heroes Act of 2008 - signed by Bush June 17, 2008. The exit tax is now the law of the land - you can still leave freely (though DHS has proposed changing that too - you'll need permission to leave the country before long), but you no longer can take your money with you. At least, not very much of it.

[valueinvestor123]

ithinkbig: I couldn't agree with you more assuming you are referring to the Democrats. If Obama gets into office he will make sure that even those who earn a good living become poor. I have no idea how he came up with the idea that making $250,000 a year makes you wealthy. Someone making 250K a year with say 2 kids is not living a lifestyle equivalent to say Henry Kravis. His tax plan basically wants to make it so those who worked hard to get ahead are as miserable as everyone else. Furthermore, I would challenge someone to give examples of a country that pulled itself out of financial trouble by taxing its people more.

[buyitcheap]

2012 - given the scenario playing out - this could be the ultimate Mitt Romney moment. He has the qualifications, knowledge, and focus to do it. It will take a crisis for this country to embrace a guy like him. If Barak wins, the coming tumult will drain all credibility from the democrats. Hate to make this a bit partisan, but if the predictions in this column and others come to pass, it sure does seem tailor made for a guy like him, or MAYBE Ron Paul. I'm not familiar with a Democrat equivalent.

[bearfund]

ozzy, To hell with the exit tax. When I go, my money is going with me - on my back, in the form of gold. The only way anyone is getting it is to kill me, which is just as well since I wouldn't want to live without it. Good luck trying to stop me. It would cost more than GDP to adequately seal all the borders.

[debtacid]

What a long winded morass just for "buy GLD" advice. And I disagree with the Japan analogy. The collapse of USSR is much better analogy. They were bankrupted by cronyism, over spending and war, just like us. At least they had the guts to let house of cards fall so they could rebuild...

[balois]

@debtacid – spot on!
During the so called « lost Japanese » decade, they kept on living decently, very civilized, no growing soup kitchen queues to my knowledge. They travelled the world with a strong yen, their car and other industries kept on developing world market beating products – and their personal savings staid at record level and record value – certainly compared to the de-based US Dollar.
So what is so wrong about such a « lost » decade? Give me this kind of misery anytime compared to the socialist bailout to preserve the privatize profits of some WS hacks.
As I mentioned in another post, it is definitely Beatles time (back to the US...back to the US...back to the USSR...)

have a good day

[boneys dad]

buyitcheap makes a good point albeit one I read many years ago
in baron's when hedge funds were infants. I believe the article centered on how the funds were succeeding in rationalizing various companies within poor performing sectors. The last point made in the article was that one day the US govt' would be rationalized. I had hoped that Reagan was the president to do so but he failed to veto all of the spending bills sent by the demo congress. Unfortunately when the great day of reckoning comes we need to hope and pray really hard that the great masses realize where the source of our systemic problems and don't demand more gov't programs to end their problems. Ron Paul was the first politician that I supported with contributions although I came close with BG. IMHO Paul was the lightening rod we needed and I felt his program needed on minor tweaking to usher in a new age of financial freedom (this time without the racism, and unnecessary wars) not unlike the period starting around 1880 through 1927. With few exceptions we need to return the political class to an afterthought. I am constantly amazed at how easily citizens surrender their God given rights. Private property rights are paramount as is a low level of taxation and a large dose of citizenship. If more than 5% of the under 40 crowd even knows what citizenship is. We have allowed the pyramid to stad on it's point where all power is seemingly derived from the gov't. 90% could go and it would still be burdensome.

[secmaven]

The US is central banker to the world. Japan was not. All this glib talk about letting the financial system flush out the weak sisters and all will be well overlooks that fact. Our central banker role will be flushed right along with a parade of Indymac's.

[carey_jim]

Several points:

Japan is not America. Japan is a paternalistic society where, to give only one example, employees are afraid to buy a car that is more expensive than their boss's car because they all park in the same parking lot and everyone considers it a deep show of disrespect to the boss and the buyer feels an obligatory deep shame.

Japan has a paternalistic tradition of taking care of its subservient and sometimes obsequious workers.

The opposite is true in America: America is a country where the powerful have virtually no concern for the welfare of workers and the workers have no concern for the welfare of their bosses.

Historically, the powerful in America have always turned their backs on their workers and used newly imported, cheaper or even free labor from African slaves, indentured servants and exploited native Americans (the fur trade and land “trade”) to imported Irish bog trotters, Chinese coolies and Mexican braceros. Now they are quite happy to outsource jobs to spare workers the pain of actually having to come to America to displace workers and destroy unions.

The American tradition includes a deep suspicion of any movement of social cohesion or solidarity, either from the top (paternalism) or from the bottom (labor unions, socialism) or the middle (liberalism) to take care of workers. America is the least paternalistic, socialistic country in the world.

All the fears of American socialism and paternalism are absurd hallucinations based on hypocrisy, or ignorance and stupidity, or all three.

It's particularly ironic that the new push to save the economic system with government help is coming from the Republican “right.”

Start your analysis from there and then proceed.

[simjos04]

Your extrapolation of Japan to assess the US market is flawed and basically TRASHES your theory weak theory. The US has low unemployment, even including your 20% increase reference. Japan had a 0% savings rate and interest rate that made their Central Bank ineffective. Guess what, 5% increase in the US savings rate and the rates will head higher once stability in Financials is concrete. Also, due to your lack of Real Estate knowledge in the New York, foreigners have always invested in the NY for years. Even in the bull run up, you have investors for every nation from Israel, Russia, Europe, Middle East and South America. Please dont scare people bec they are not scared bec you have no crfedibility.

[nmau]

This kind of pessimism has been proven wrong time and time again. As another poster pointed out the PE in the US is MUCH lower than Japan was. And the profits keep rolling in or has the writer not noticed. Even some banks are making money.Yes there are the write-offs, but these are nearing the end. This type of end-of-the-world thinking is a BUY signal.

[goldenhinde]

Many good thoughtful comments on this thread. One observation: the answer as to "what to do about the mess we are in" depends very much on what the purpose is you are trying to achieve. I suspect if each person posting described their purpose, the thought process that followed might appear to be more consistent than what is otherwise the case.

Is the purpose of "fixing what's broken" to (1) sustain the broadest number of middle class Americans in the lifestyle they are accustomed to, (2) promote investment from the rich, (3) financially put a net underneath those who find themselves in deep financial trouble (4) remain the central banker for the world ...Just what is the end game here.

For whatever it is worth, and in very generalized terms, one observation I have is that rich folks abhor government intervention until they want it for THEIR economic interests. Then, it all seems to make sense to them. Poor folks have developed a mind set in which they are more emotionally comfortable thinking of themselves as victims of someone else's actions rather than digesting the fact that they are architects of their world (as seen from their shoes).

If you want personal responsibility to be part of the game then it ought to apply everywhere. If you are fat, smoke, eat lots of red meat and drink to excess you have that right - just don't ask the citizens of this country to pay for it. Your health insurance should cost you an amount of money that reflects the risk you represent- which on an NPV basis is greater than someone who doesn't engage in such behaviors.

Our entire economic model is substantially unprincipled and I would argue that this is part of the problem. If you don't measure it - it doesn't count in our system. Reality be damned. So if your economic activity causes a certain level of pollution for example in air or water why don't you pay for it. Given that the cost of dealing with the pollution is not zero, then not paying for it is assuming that the responsibility for your actions rightly falls to someone else.

If you run a company and use shareholder's assets to engage in economic activity then, as a manager, you should be made to apply a "rental charge" for the use of shareholder's capital for any project. To have accounting rules which ignores this fundamental prnciple now means that you've structured an enterprise so that management can use shareholder's net worth for "free". You can generate accounting profits that bear no basis in reality for a cost of capital or even a risk free rate of return a shareholder could otherwise earn if they didn't want to take any risk.

Welcome to GAPP accounting.

It is a far differnt lens with which to look through than say an EVA (economic value added) lens. If you aren't familiar with EVA and you are an investor - you are missing something important.

So, if what you measure doesn't match reality (I have presented a few examples) you are building a system which is fundamentally flawed. A wake up call is built into such a system and a systems engineering approach is required to put in the "fix".

It all starts with what are you trying to accomplish.

[barnburner]

carey_jim, good post. For those of you who take every opportunity to make a political statement-you don't get it, there is only one political party in the U.S. and it has two faces, one call 'Democrats' and the other calls themselves 'Republicans'. The corporations own ALL the politicians and pull the strings to benefit their bottom line. I think it was a similar situation in Italy in the late 1930s.

[truthinvesting]

The past decade I became financially independent going low Altria and Others like BUD BRK which were undervalued. One who has a portfolio of KO RAI PFE JNJ MO PM KFT UST and many other STRONG STOCKS l will do fine.Doom and gloom is usually the highest at market lows

[Kunst]

We have a fundamentally corrupt political system. Politicians cannot be successful without campaign contributions from economic interests whose goal is to rig the game in their favor. We don't have a democracy; we have a money-ocracy. Free market, hah!

[jlounsbury59]

Goldenhinde - Excellent summary!!!

Will we ever elect someone who will do the right things for the future instead of pandering to the uninformed electorate? My answer is: only by accident, because the instant gratification society of the USA would never give a majority vote to a candidate who ran on a platform with long range goals and short term sacrifice. This is what we need and there is small likelihood that we can get it.

There are many models that can work. Ron Paul has one possibility, but by no means the only one. Something quite the opposite could also work, or any number of models in between. The keys to any pathway out of the current debt spiral (public and private, although some recent events call in to question whether there is any distinction between public and private debt) and dollar decline has one key ingedient. What is key is that no discretionary public money is spent that does not have economic productivity consequences. I don't mean economic productivity for "energy producers" or "financial institutions" or any other sector. I mean economic productivity for society as a whole. This is very difficult to accomplish because (1) it is hard to define, (2) can not be done in the face of some special interests maximizing their individual interests via lobbying, and (3) is impossible if any degree of corruption is occurring.

Is this unrealistically idealistic? Maybe, but I hope not absolutely impossible.

To address some factors of importance:
1. An energy policy that not only exploits fossil fuels in an environmentally responsible way, but also develops non-combustion based energy sources to meet ever growing energy demands in the face of declining fossil fuel resources.
2. Remove excess leverage from the financial system. This involves futures margin requirements, open markets for debt instruments and credit swaps, and realistic limits on leveraging "high quality" debt. The 100+/1 reported leverage by FNM and FRE is way beyond a realistic limit, in my opinion.
3. Find a way to reduce the influence of lobbying that seeks to maximize the economic benefit of a particular interest without regard to consequences to other interests. All interests are not equally represented by lobbyists. If they were, the lobbying process would be an excellent means of arriving at the "greater good". I think it is most unrealistic to think that this model of equal lobbying influence for all interests could be achieved.

[WarHawk]

What a collection of self serving pap. The Fed did it? Creeps like you did it. Now that it has fallen on your greedy head, you wanna blame the psyudo-government. 70s stagflation is here! Might as well elect Carter... er Obama! Results will be the same. But the blame is on Wall street this time!

[xander]

drill drill drill;that will slow the flood of wealth leaving our country, giving us time to mend our economy.

[user225084]

Emerald,

Right on about "infrastructure&q... being code speak for a new bubble inflated with public works money. If I hear one more plug for JEC on tv I'm going to puke.

[erzs]

Ladies & Gentlemen,
This is not the first recession or slowdown, (whatever someone wants to call it), nor will it be the last one. We have gone through all of these things before and came out of them OK. The world is not coming to an end. I am amazed at the press talking and printing heads, they are supposed to be smart and rational, yet they never act this way. Japan can not be compared to the US, for many factual reasons, Japan does not have natural resources the US has, does not lead in technology the way the US does, does not have the agriculture land that the US has, did not have inflation in the 90's, it had deflation. You can not have strong economies without consumers. Over the long term consumers maintain strong economies. Canada was in worse shape than the US in the 90's, We had a more or less real estate crash in Ontario, I remember reports back then that said, due to the Canadian high debt and very high budget deficit, the Canadian dollar was going down like crazy, from 1.10 USD to 1 CAD, in the 70's to 62 cents in the late 90's, all the economic talking heads were saying the same thing about Canada then that they are saying about the US today, in fact, they were predicting Canada would be bankrupt within 5 years max. Nobody can anticipate what will happen in the future. But the facts speak for themselves. Today the Canadian dollar is back, it is equal to 1 USD. The Canadian government did not go bankrupt, instead it has been operating with a budget surplus now for the last 10 years. Our economy was revived again, in fact, it is doing very well, compared to the rest of the world, we have the best economy in the G8, foreign investors that invested in Canadian companies during our bad years, did very well and are still doing very well, etc........

I compare the US now to Canada's crisis in the late 80's and early 90's, the US will come back stronger like Canada did, because the US and Canada are similar, in natural resources, technology, foreign investment, consumer driven economies, style of government, stable political environment, agriculture, culture etc..... Japan and the US are not similar.

However, I have an engineering back ground. I am not an economist. I don't know how to predict the future and I don't intend to learn. But I know one thing, the world has seen these crisis before and always came out of it. Lets keep things in perspective. Lets keep things rational and intelligent. Many Wall street financiers, economist and talking heads seem to like drama. They also seem to have short and selective memories. I learned not to trust them. I agree with the comment about Warren Buffet above. His facts speak for themselves and last time, I read about him, which was not long ago, he was not selling his holdings and hoarding gold. He was buying very cheap companies in and outside of the US, mainly companies that Wall street trashed and that is what he always did. He must be much smarter than anybody else on Wall street, because he has made a lot more money than any body else on Wall street. One more thing, Warren Buffet does not get excited and irrational and he does not make irrational statments like George Soros and Jim Rogers and all these people that keep telling us the world is going collapse and we are going to have a very bad ending.

Anyway, this is only my humble opinion, I am selectively buying American banks now, I am buying good cheap companies that Wall street trashed, such as Nvidia, Vasco Data Securuties, I am buying Lloyds bank also and Barclays, they have been trashed also and they have excellent dividends, I am buying a good American Tobacco Company with excellent divident Vector group, I already have quite of few Canadian dividend paying companies and I just bought a very interesting Chinese company A-Power Energy Genration Systems.

I totally believe that in 2 years, most of these banks and companies will be worth a lot more than they are worth now. Good luck to every one and don't get taken by Wall street's drama.

[rlot]

Sound scary but I don't necessarily agree of a parallel here. Remember one rule of investing: There is no such thing as XYZ becoming the next ABC. And besides, the U.S. and Japan have different laws, cultures and mind-sets. Neither will behave like the other. Americans have always had the ingenuity to solve problems in a most efficient way.

[GaryBG]

This is very similar to the prediction of Harry Dent who at one time forecast a 40,000 DOW (and had the metrics to support it) and now calls for a substantial depression starting around the end of 2009 and extending for quite a number of years. The short story of it is simple. in 2008, the midpoint of the BabyBoomers passed age 55. At that age, savings become more important than acquisitions as there is not a lot of time left or promotions to come to pay off the debt in time for retirement. We are a consumer led economy. It makes great sense to me, does mirror the Japanese model of their lost decade. It also makes sense to me that it could be much worse because we, unlike Japan, are a net debtor nation and that will go on and on. Spending $700 billion a year just to buy oil is the road directly to financial disaster. It isn't a theory as that is what we are doing at this moment and without an energy plan of any sort anywhere in sight. I'd agree it looks bad and intend to continue to get to a conservative position where wealth protection ranks number one, period. The risk is too great and the only negative is to miss out on the next big financial gain...in what or when I have not a clue.

[buyitcheap]

Gary, couldn't agree more.

[Takayama]

Japan is quite different from the USA.

Japan did not fight any wars in the Middle East and Afghanistan.
Japan did not wage a global war on terror.
Japan did not have a huge national debt.
Japan did not have a weak currency.