U.S. can learn from Japan's deflated economy in the 1990s

Though recessionary symptoms are multiplying in the USA, most economists expect a brief recession that will give way to renewed, if anemic, growth in the second half of this year. Few expect to see Japan's "lost decade" replayed here.

That optimism, however, like the cheery forecasts in the early days of Japan's prolonged slump, may prove overly sanguine, according to a significant new study.

The research paper, by Harvard University's Kenneth Rogoff and Carmen Reinhart of the University of Maryland, found widespread parallels among 18 industrial-nation banking crises since World War II.

Such financial train wrecks bleed economies badly, the study found. The tally for cleaning up in Japan, for example, amounted to more than 20% of gross domestic product; if the current U.S. situation deteriorated to that degree, the bill would be a staggering $2.8 trillion.

Rogoff, former chief economist of the International Monetary Fund, says it's more likely that the subprime debacle ultimately will incur costs roughly equal to the mid-1980s savings-and-loan crisis. If so, that would mean still-sizable losses of almost $450 billion.

"If the U.S. escapes with just a mild recession, we'll be lucky," says Rogoff. "There's a chance we'll have no recession, but there's at least an equal chance of a deep and long recession with high direct and indirect costs."

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