Japan’s “lost decade” has been a perpetual case study for economists and business schools alike. Keynes’ monetary policies, which have to do with the supply and the cost of money, never envisioned a decade of prosperity predicated on historically low interest rates.Â As we entered this recession, that whole side of monetary policy should have been declared dead on arrival as the Fed lending rate had been very close to zero and money supply had been at unprecedented levels for many years. If the economic expansion leading up to 2008 happened while mortgage rates were at 8-9% in a reasonably chastened lending environment, then monetary policy would have been a very powerful tool for the Obama administration to use. The fact that the Obama team ignored this fact and gave banks more money atÂ 0-.25% and not much borrowing or lending has taken place confirms the we are heading into the same trap as the Japanese.
The common global culprit that started in Japan in the 90’s ; call it the atrophy of Freidman’s free-market ENTERPRISE value system (Click here for an earlier value systemsÂ blog explaining what investment means to the different value systems) was the shift from having monetary Keynesian policy (ORDER-value system economic tools for policy makers) being completely marginalized by populist consumer-spending policies. When that happened, interest rates had to be reduced to close to zero to maximize consumer spending. (Give money to all regardless of their value systems and see what happens). This process created unprecedented wealth as the consumer’s purchasing power almost doubled by the shear drop in interest rates. To the housing market, this caused meteoric rise of property values and achieved its intended goal of transforming homes into ATM’s. Japanese bankers exhausted the heck out of this model and created things like 40 and 50 year mortgages till there was nothing left to create. By the time the Japanese property bubble burst, the Imperial Palace in Tokyo was worth more than all property valuations in the state of California (now that’s what I call a bubble).
Japan’s banking sector suffers from what’s known as “Zombie Banks”. A phe.nomenon where there are lots of lenders but few borrowers. I’m afraid that’s where the US will be in another 2 years. The speculative FUEDAL/UNHEALTHY ENTERPRISE value system is still alive and well and is still driving much of the activity on Wall Street and at property auctions all over the country.Â We won’t get a full picture of the damage, a stage called price discovery, till most of this speculative activity stops. Consumers falling into the HEALTHY version of the ORDER-to-ENTERPRISE value system on the other hand, are a wise and powerful bunch and have taken corrective measures to reel in their spending. This has been the only meaningful bright spot in a minefield of otherwise useless economic data in the past 18 months, AND THE BANKS HATE IT!
Homes need to become ATM’s again to bring banks out of their zombie state and that will not happen any time soon simply because property values haven’t bottomed out yet. As of the date of this blog, the total number banks that have failed in 2009 in the US stands at 140 and at the cost of tens of billions to the tax payer.Â Once the dust settles, and the taxpayer’s thresh hold for FDIC-style bailouts is fully exhausted, public opinion will not support the role of banks being anything more than a utility.Â Only when banks are sidelined in such manner through necessity will homes be used as places of residence again and not as a speculative investment vehicle and that will spell the end of a nasty adventure into ill-conceived economic policies.