Heinz,
My understanding is that the Fed tightened money supply first, then on realizing their mistake, tried to backtrack - which was like using modern antibiotics after the patient had already died from the medieval treatment of drawing blood. All over the political landscape, there were righteous calls for pain w/o an iota of economic understanding (imagine a zillion Luc's all around, all at once).
In Japan, too, the bubble was deliberately deflated by the monetary authorities. Liquidity crises are nothing new, and solutions are also age old. Also, liquidity crises do not necessarily indicate a structural problem with the system (did you get a chance to read the Krugman book that I recommended?). The solution, often, involves just adding additional liquidity to the system and creating a little inflation.
However, usually, relief from liquidity crises/deflation do not come from having a strong currency and relatively high real interest rates, as it translates to tighter money supply for a net importer. OTOH, there's the present opportunity to force the banks to clean up their books. Which one will the BoJ choose? I think that they are going to let the printing presses run in full swing in near future.
-BGR. |
