Be very afraid. The maximum likelihood estimate of how long it takes to recover from a financial crisis, based on the Japanese experience, is forever. They are still not out of the woods.

The Japanese have never had a dramatic recovery program.  What they’ve had is ameliorative programs.  They cut interest rates as far as they could.  They’ve had fiscal support, which has been enough to keep the economy from plunging but never enough to generate a boom.  The theory of the case has always been that eventually private market forces would come along and generate the recovery and they could withdraw the stimulus.  That is not happening. 

You need something more aggressive.

We have a real shortage of role models.  Recoveries from financial crises almost invariably are export-led.  The trouble is now we have a global crisis and you can’t do that – unless Mars becomes an export destination.  You look for examples of financial crises where export-driven recovery was not an option.  Japan, to the extent they had a recovery for a while, was export-driven. But Japan is a relatively closed economy and they never really recovered. 

The Great Depression was ended through a mega-fiscal stimulus on a scale that is presumably impossible as a political matter. [Ed. Note: For an alternative explanation of the reasons the Great Depression ended, see this article: Bruce Greenwald on Structural Problems in the Economy and Unemployment]

I have spent a lot of time worrying why did Word War II work?  We understand why it generated a lot of employment.  Why didn’t we slide back to the Depression after it was over?  Part of the answer is that there was a fair bit of inflation in the world.   We actually inflated away a lot of the private debt.

Something like 3%, above trend but not dramatically.

I’m much more worried.  It will be more like 2%, below trend.

I am not worried about inflation at all.  I am worried about a double-dip or jobless recovery much more so.

Personally, I am very risk averse. 

It’s a barbarous relic.  I would feel bad about owning it, even if I was making money on it.

I was going to say a “B,” but I have moved him up to a “B+” because of healthcare.  This may not win him a lot of votes and may not pay off for the Democrats in the near future.  But this is huge.  We have spent more than 60 years to get to where we are now.  It’s a highly imperfect bill.  But, my God! Just five years ago we were desperately trying to prevent the privatization of social security.  And here we are now with a more or less universal health care system.  That’s a big deal.  And history may say that is the important thing that happened.

Do everything you can to stimulate the economy.  They may have shot their bolt on that dimension.

The other thing is that they need to take on the financial sector and financial reform, partly because it is important, but also because they need a little bit of symbolic victory.  He needs to guillotine at least one Wall Street person, just for the form.

There is no question that if you count the number of people who have seen dramatic improvement versus dramatic worsening, the improvements greatly outweigh. To say to the unemployed American, who is losing his house, “but the Chinese have done great,” is not a very helpful statement.