US can learn from Japan on policy for bad home loans

The author of the article believes that there are similarities within between the current situation in the US and the situation in Japan in the 1990s. Back then, Japanese financial institutions were plagued with bad loans, which the banks and politicians refused to acknowledge or deal with. At that time, many policymakers argued that this policy of forbearance was essential to preventing a damaging property price crash. Although this attitude did prevent a property price crash, in place of it was a climate of deeply ingrained cynicism and unease. Many people knew that Japanese banks were sitting on this set of problems and the mood of corrosive distrust and unease set in, which created a deflationary mindset.

Looking back on this, the author believes that banks need to be allowed to proceed on abusive foreclosure process, that has been forestalled recently due to the robo-signers issue, or proceed on universal modification of loans. Whatever that needs to be done needs to be done swiftly, or else the deflationary mindset will seep in. This mindset will not be able to be fixed by cheap money.