Thursday, December 04, 2008

Japan as the New Paradigm for Dummies

The English-language news is full of fascinating stories on how the post-Bubble economy is like anything anyone wishes to say it is, for rhetorical purposes. Even frothing-at-the-mouth nonsense.

Fed's Bullard Says Cutting Rates May Risk Japan-Style Deflation

Dec. 2 -- The Federal Reserve may provoke deflation by cutting the main interest rate, and policy makers should consider relying on other tools to revive the economy, St. Louis Fed President James Bullard said.

"I'm more concerned at these very low levels about the Japanese outcome" last decade, Bullard said today in an interview, while noting that deflation isn’t an immediate threat. Japan's central bank “went to zero” with its main interest rate, and “deflation becomes a self-fulfilling thing and you are stuck at zero."
Now I am hoping, guessing, praying that Dr. Bullard said nothing even remotely like the above--because it is insane.

More likely Dr. Bullard was trying to contradict the notion that extraordinary actions come in an inviolable sequence: first a target rate of zero, then unconventional measures. Just how one could increase the provision of liquidity while trying to maintain the effective target rate significantly above zero boggles my imagination, but then my imagination is around solely for the purpose of being boggled.

However, the Bloomberg article is not the only Japan-inspired bit of wacko in the paper this morning:

Japan's 'lost decade' pushes US to overcorrection: analysts

WASHINGTON — Lessons from Japan's "lost decade" of the 1990s are pushing the United States toward excessive steps to counter deflation and recession that could spur other economic problems, analysts say.

The collapse of a real-estate bubble, bad loans that sap the financial system, evaporating growth -- a series of events has led the US economy to a decline in consumer prices -- eerily resembles Japan's crisis in the 1990s.

The situation is quite familiar to Federal Reserve chairman Ben Bernanke, an expert on Japanese deflation.

Bernanke oversaw the rapid reduction of the Fed's key interest rate, taking it from 5.25 percent to 1.0 percent in little more than a year, in response to the global financial crisis that erupted in August 2007.

By contrast, the Bank of Japan raised its key rate in the early 1990s at the start of the country's crisis, before letting it slide to nearly zero after 1995.

The US central bank, in addition to lowering rates, has wielded an array of so-called "nonconventional" tools to support the credit markets, including cash injections, massive loans to financial firms and direct purchase of private debt.

"The Fed has been more proactive. The Bank of Japan used the nonconventional tools only after lowering its interest rate to nearly zero," Takeo Hoshi, an economics professor at the University of California, San Diego, told AFP.

The Fed dramatically bulked up its monetary base which it directly controls -- its own money and the reserves of banks. Since mid-September, the coffers have grown 63 percent.

In Japan, the monetary base of the central bank increased only 17 percent in five years, between 1990 and 1995.

Still, credit remains choked in the US financial system as banks hunker down amid the worst financial crisis since the 1930s Great Depression.

"Monetarist Bernanke and others blame Japan's post-bubble deflationary downturn on policy errors by the Bank of Japan. But he and others are about to find out that monetary gymnastics are not as effective as they would like to think," Hong Kong equities strategist Christopher Wood, who wrote a book on the Japanese real-estate bubble, says in a Wall Street Journal opinion article.

Lowering rates and flooding cash into the financial system pose inflationary risks, Hoshi says.

"In 2003, when it lowered its rates to fight against deflation, the Fed has been too successful in a way. Many criticize this policy for creating bubbles," the California professor said.

Hoshi noted that a "too cautious" Japan had unleashed "years of stagnation."

"The error is possible on both sides. The Bank of Japan had committed the error of being too conservative. The Fed may have committed the error of being too liberal, too aggressive. It's very difficult to balance both risks," he said...
Wow, taken as a single argument--as the title of the article would have us do--monetary gymnastics spur inflation, except where they do have any effect against stopping deflation. The years of stagnation resulting from the inaction of a too-cautious Bank of Japan are teasing the Federal Reserve to overreacting, extending too much liquidity, resulting in banks refusing to extend credit as they "hunker down amid the worst financial crisis since the 1930s Great Depression."

The author of the above (yes, I mean you Hughes Honore) is just about screaming, "Look at me! I can stand on my feet and on my head at the same time, casuistically!"

With apologies to Porfirio Diaz, I can only wail:

Poor Japan! So beloved as a metaphor, so abused as a source of actually useful experience!

Later - Most of the time I would not quote such a large chunk of a newswire's proprietary output...but it was impossible to capture the frenzied shifts of perspective through brief quotations.


Ken said...

How about the "Bernanke-san" claptrap?

Anonymous said...

found you via our man in abiko.

good blog.

the point with the US at the min ute and Bernanke is that they are pushing on a string.years of overleverage in the financial system have created a situation where there isn't a pain free solution,much as they pretend there is.