Comment by cwan | Hacker News Reader

Comment by cwan | Hacker News Reader

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Japan never actually dealt with the bust - and instead of taking the short term hit, they spread it over two decades. This was the problem - not the loss of confidence - which is an effect rather than the cause of the current malaise. When asset prices ultimately collapsed following the bubble, the government chose to prop up zombie banks instead of writing down grossly overvalued assets and restructuring debts - an issue that I worry about myself in the US though I think (and hope) American policymakers are wary of similar consequences.

This goes back a bit to the debate over whether or not it's possible to have economic growth without dynamism. That yes, you do have booms but you also have busts but that the net benefits of the booms (in productivity and innovation) far outweigh the consequences of any bust. Governments who attempt to dampen busts (e.g. minimum wage, stimulus, propping up businesses that should otherwise die off) as a corollary also tend to dampen recovery and growth (e.g. resulting higher interest rates, slower hiring, stagnant growth of new businesses as zombie firms squeeze resources that would have otherwise been reallocated).

It's often been noted that organized crime had a significant part in the current Japanese malaise. They were part of the reason for the ease with which bad loans could be made again and again. It seems likely that they were instrumental in much of the corruption.

Also note that the leadership of the Yakuza is very politically conservative. Putting the brakes on economic development would also serve to slow down social and cultural change, as well as producing a climate generally friendlier to extreme right-wing politics.

You can boil much of the Japanese bubble and persistent malaise down to pervasive fraudulent accounting. Fictitious book values and profits were and are everywhere. I dare say it's more common to Asian cultures than Western, as the 1997 crisis and current practices in China indicate.

The moves in the US to weaken mark to market accounting rules to paper over weakness give great pause.

The problems in mark to market accounting wasn't so much in the accounting itself which generally should prove irrelevant given that the disclosure ends up being in the notes. The problem is because of regulatory accounting which requires that you need a certain threshold of regulatory capital - and the writedowns (even on bonds that companies intended to hold for their full maturity) meant that they were immediately undercapitalized or overcapitalized based on the whims of the market - an almost perfect storm at the time because these were relatively new regs.

Granted, you could make the argument that these banks should have had greater reserves, but it is also useful and relevant to note that many of these banks may not have failed if they were not forced to sell of some of these assets at their lows as a result of regulatory requirements that did not exist only a year or two earlier (I forget the date).

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