The problem, neoliberal commentators claim, was that the close ties between those running the state, the banking system and industry meant that there was not the scrutiny about what the banks were up to which a truly competitive economy would have provided. 88 It was this which enabled such a massive amount of dodgy lending to take place. As an explanation, it fails because very similar bubbles have happened in economies like the US which supposedly fulfil all the norms of "competitiveness". It is difficult to see any fundamental diference between the Japanese bubble of the late 1980s and the US housing bubble of the mid-2000s.
The neoliberal reasoning that blames the crisis on the state believes there was a solution-the state should simply have walked away and allowed some of the big banks to go out of business. But this assumes that some banks going bust would not bring down other banks to which they owed money, leading to a cumulative collapse of the whole banking sector. No advanced industrial state dare even contemplate that happening. Whenever it has seemed possible, other states have behaved in general as the Japanese have.
In any case, there is no reason to believe that the banking crisis was the ultimate cause of Japanese stagnation. The neoclassical economists Fumio Hayashi and Edward C Prescott have argued that firms that wanted to invest could still do so, since "other sources of funds replaced bank loans to finance the robust investment by nonfinancial corporations in the 1990s" .89 But they have had to recognise that "those projects that are funded are on average receiving a low rate of return".90 In fact, there was a fall in productive investment, although not anything like a complete collapse. In such a situation, restructuring the banking system, whether through allowing the crisis to deepen, as the neoliberals wanted, or gradually as those of a more Keynesian persuasion suggested, would not solve the crisis. On this American economist Paul Krugman rightly made the point:
The striking thing about discussion of structural reform, however, is that when one poses the question, "How will this increase demand?" the answers are actually quite vague. I at least am far from sure that the kinds of structural reform being urged on Japan will increase demand at all, and see no reason to believe that even radical reform would be enough to jolt the economy out of its current trap.91
The End of the Golden Age
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