Our Great Recession has been compared with several crises of the past, but Japan’s lost decade is perhaps most relevant. This is not because of the way the two crises developed – we do not yet know what will happen to us – but because of our failure to learn from Japan’s mistakes. Otto von Bismarck said only fools would learn from their own mistakes, while he preferred to learn from the mistakes of others. We are mostly fools.
I am particularly struck by the similarity of the policy responses in Japan then and Europe today. Adam Posen, deputy director of the Peterson Institute in Washington, made the following observation in a book* he published in 2000 about the parallels between Japan’s lost decade and US policy during the savings and loan crisis. He wrote: “Bank regulators issued a litany of announcements meant to be reassuring about the extent of the bad loan problem and the adequacy of Japanese banks’ capital, each of which was correctly disbelieved by other financial firms, foreign banks, and by Japanese savers as understating the problem.”
This is exactly what is happening in Europe today. Governments are not coming clean on the scale of the crisis. Süddeutsche Zeitung, the German newspaper, recently revealed an internal memo from Bafin, the country’s banking regulator, showing the estimated scale of write-offs would be more than €800bn ($1,061bn, £712bn), about a third of Germany’s annual gross domestic product. By comparison, the entire capital and reserves of its monetary and financial institutions were only €441.5bn in February. If the leaked number is true, it would mean the German financial system is broke.
Bafin was outraged by the leak, and launched legal action. Senior officials tried to play down the significance of the number. This is what Dr Posen described in his critique of Japan.
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