Dallas Fed Boss: No ‘Japan Trap’ for U.S. Economy

Japan's finance minister Yoshimi Watanabe says the U.S. government should not procrastinate as Japan did during the 1990s in the face of collapsing credit markets.

The Feds should instead spend public money now, he said.

"If there is a big hole in the bottom of the tub, no matter how much hot water you keep adding, you will never have enough hot water," Watanabe told the Associated Press.

Fixing that leak requires "an overall package, including monetary policy and public money."

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Desperate to break out of its own liquidity trap after a two decade boom that peaked in the 1980s, Japan ran huge public deficits in the 1990s but still suffered bouts of deflation. It did not really recover until 2005.

Watanabe is not alone — especially in Japan — in arguing that parallels between the two countries’ economic crises are close. So close, in fact, the U.S. should implement the same kinds of economic policies it urged Japan to follow then.

Dallas Fed chair Richard Fisher heartily disagrees.

Fisher spent much of the 1990s in Japan as a hedge fund manager and later as co-chairman of the U.S.-Japan commission on deregulation. He says the microeconomic foundations of the two economies are so different that applying the same solutions doesn’t make sense.

"To say we are falling into the Japan trap is in my view very misleading,” Fisher told the Financial Times.

Fisher acknowledges that sharp declines in asset prices occurred during both economic episodes.

But, he says, there are dramatic differences between the two societies, and their respective economies mandate different policies.

"It would be a mistake for us to do now what we advised them to do back then,” he says.

For starters, Fisher points out that the U.S. market is more flexible than Japan's was then.

It’s also dominated by securitized financial markets, whereas banks and a state-owned savings system controlled Japan’s marketplace.

"You are not even comparing apples with oranges,” Fisher says.

Fisher also notes that the U.S. didn’t push for recapitalization of Japan’s banking system until its economy had stagnated for several years following the original stock market and real estate crash.

That doesn’t apply to the U .S. today.

"We are adjusting much more quickly,” Fisher says. "We are going through the price discovery process. It is enormously painful, but it is happening.”

Raymond James CEO Tom James clearly agrees the U.S. economy is beginning its recovery.

"Although the damage to the financial services industry is not yet over, I believe that the worst is behind us,” James said in an interview on CNBC.

Nevertheless, in a company release, James called for better regulatory efforts.

"I'm frustrated by the fact that our results and those of many other conservatively managed financial institutions have been impacted negatively by fallout from inadequate underwriting standards and other lax management policies as well as a lack of regulatory oversight, ill-derived ratings and unregulated mortgage practices," James said.

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