What's the Time in Japan's Lost Decade?

The subprime crisis is becoming more and more similar to Japan's "lost decade". This week, the U.S. Treasury Secretary Hank Paulson said that the government was thinking about the bailout of Fannie Mae and Freddie Mac by public funding of 10 billion dollars.

It is comparable to the situation of 1998 in Japan, when the public capital of 1.8 trillion yen (15 billion dollars) was injected to Long-Term Credit Bank and other twenty banks. After that, LTCB was injected nearly 8 trillion yen, half of which was lost when it was nationalized finally.

Japan's lesson is clear: such fuzzy bailout makes things worse by bringing about the moral hazard that conceals bad loans, waiting for the government's rescue. Yesterday the Supreme Court judged that the CEO of LTCB who window-dressed financial statements was not guilty because "every bank did it those days".

The situation seems a little better in the U.S. because banks didn't window dressing (at least no such case was found yet). However, if the government injects capital to failing banks, most of the capital is likely to be lost and the burden would be passed to taxpayers. Such irresponsible policy would hurt the credibility of financial systems seriously. It's the core problem of Japan's lost decade.

Learning from Japan, the worst thing should come fast. If it's inevitable to nationalize Fannie and Freddie, as The Economist suggests, President Bush should not hesitate the decision. He has an advantage to do any unpopular policy because he can't be more unpopular.