Policy errors by the government authorities also made things worse. Instead of cutting official rates the way the Fed has done, the Bank of Japan initially raised them, exacerbating the crisis. Fiscal policy also was not as responsive as it has been in the United States. Deflation resulted, leading to a sharp decline in consumer spending as the mood became "Don't buy it now, because it will cost less later."

Japan had other problems that hampered its ability to deal with its crisis, problems the U.S. does not share. First, its population trend-line rate of growth is more like 1 percent rather than 2.5 to 3, as in the United States. Second, its one-party political system proved inflexible. Fiscal-stimulus bridges to nowhere were built, when tax rebates should have been mailed directly to the people. No radical changes were considered. Federal Reserve chairman Ben Bernanke himself told the Japanese to, in effect, flood their economy with liquidity, even if it meant dropping money from helicopters. Since then wags have referred to him as "Helicopter Ben." Third, the strong yen retarded exports. Finally, Japanese companies with their rigid, hierarchical system of management had difficulty in responding to the suddenly changed environment. Layoffs were based on salarymen's tenure rather than usefulness; broken banks were allowed to labor on.

All this said, I find it reassuring that the Fed and Bernanke have closely studied the Japanese experience. They know that the governor of the Bank of Japan at the time was actually indicted by the Diet as an "economic criminal." The Fed may make other, different mistakes than Japan did, but it is unlikely to repeat the same ones. However, so far the authorities in the United States, both fiscal and monetary, have responded in an enlightened and prompt manner. None of this changes the hard reality that the U.S. and the world have a big problem to work through. Depression and stagnation? I don't think so. Just one more cleansing market and economic cycle.

Biggs, the famed Wall Street strategist, is a managing partner with Traxis Partners hedge fund in New York.

© 2008