US Current Financial Crisis versus Japan's 1990s Crisis
While explaining his Financial Stability Plan, president Obama pointed to the dangerous consequences of not acting in a timely manner giving what happened in Japan in the 1990s, "where they did not act boldly and swiftly enough, and as a consequence they suffered what was called the "lost decade" where essentially for the entire '90s they did not see any significant economic growth." Treasury Secretary Tim Geithner also pointed that the current Plan is guided by the lessons of financial crisis throughout history mentioning that Japan crisis in the 90s lasted longer and caused greater damage because government applied the brakes too early, and the US current Administration cannot make that mistake.
The comparison between the current crisis and Japan's 90s crisis is fairly true in terms of the origins as both were initiated by wide spreading of reckless lending on the assumption that real estate prices would continue to go up, while it sharply reversed down triggering the financial market turmoil. Also the Japanese authorities took a long time until 1998 to begin cleaning up and recapitalizing its banking sector's assets.
However, a major difference in the initiation of the crises is that in Japan, corporate borrowing soared before the burst against the collateral of rising shares and commercial property prices, while in the US crisis, residential debt that much of the complicated mixture of debt products originated from has been the cause of the problem. Cleaning the balance sheet of the corporate sector is much easier than cleaning the balance sheet of the household sector, that's beside the difficulty of justifying using taxpayers money to bail out homeowners who bought mortgages they could not afford. Actually, not only the origin of debt is different, but also the size of debt. In Japan, the size of debt during the crisis reached 52% of the GDP (10% of the GDP for household), while it reached 294% of the GDP in US, almost 100% of the GDP belongs to the household sector. Additionally, the size of banks' holdings of troubled assets (in absolute terms), reached to $910 billion in Japan, or 35% of the GDP, while it amounted in US to $5.7 trillion or 40% of the GDP (according to Goldman Sacks estimates). The US banks forced to write down securitized products promptly due to mark-to-market accounting, while Japanese banks in 90s were allowed to take time to dispose their nonperforming loans since their lending assets were largely not tradable. The IMF recently estimated the size of write downs in US by $2.2 trillion.
Finally, as much as the nature of the economy is different (though macroeconomic indicators are not) between US and Japan in terms of debt and saving ratios, the scope of the crisis creates different implications. Japan's 90's crisis was an internal one, and through exports Japan could pass the economic recession as global demand remained solid. The current crisis started in US but spread globally, demand for good and services and capital availability thinned worldwide, which needs demand to be motivated from inside US. The US started earlier in its efforts to overcome the crisis. The last $787 billion Financial Stability Plan takes most of the above facts into account, it allocates large sums to boost demand through government expenditures, and it allocates other part of the fund to clean the balance sheet of the banking sector. It also attempts to improve the affordability of mortgages by providing access to low-cost refinancing and provide incentives for loan modification for mortgages already owned or guaranteed by Freddie Mac or Fannie Mae. The majority of subprime mortgages were not of this type, thus, the most in need mortgage debtors do not qualify.
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