Dave Yuhas's Library tagged bailout →  View Popular

What if the government's response doesn't end the paralysis that is promp-ting banks and businesses to hoard their cash? Would that be so bad? Would the economic down-turn that President Bush warned about be a better

alternative than an ultimately open-ended government commitment to keep injecting money into the financial system until the crisis eases?

Mr. Bernanke and his fellow worriers need to connect the dots. They need to use their bully pulpits to teach a little lesson on the economics of a credit crisis — how A can lead to B, B to C and C to Depression.

Let’s give it a shot, then.

Japan’s experience in the 1990s is a cautionary example of the peril of propping up banks after a real estate boom ends. The Japanese government helped keep many troubled banks afloat, hoping to avoid the pain of bank failures, only to extend the economic downturn as consumer spending and job growth fell.

The Japanese slump continued for many years, ending only a few years ago, a stretch of economic stagnation known as Japan’s lost decade.

“The lesson from Japan is that tough love for the banks is what’s needed,” said Kenneth Rogoff, an economist at Harvard. “In the current crisis, you do want to get rid of the bad assets from the banks, to get markets working again. But the key is going to be in the details of how the bailout works. You don’t want it to be a subsidy in disguise that keeps insolvent banks alive. That would just prolong the economic pain.”