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Updated Wednesday, January 27, 2010 10:09 am TWN, By Amity Shlaes, Bloomberg

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Obama short-term policy fine for Japan Inc. talk

This idea is the most Japanese of any he will present, in both a good and bad sense. The president is right: depositors should be able to count on most of their deposits being there. But to establish a system in which insured deposits of citizens reside at banks or thrifts that can't participate in many of the opportunities of the global economy is to replicate the bad aspects of the Japanese postal bank system.

That sounds appealing given the ruction of the past two years. But over the course of history Japan's postal banks, as well as their analogues in Germany, have offered limited returns to their depositors. It will cut depositors out of some of the opportunity that lies ahead. The result of the sequestering of their cash has been a safe life, but a lower standard of living, for the Japanese.

The real reason that the administration feels the need to push for such protections is also Japanese ─ an unwillingness to do something more fundamental, end the too big to fail doctrine. If there were no too big to fail doctrine, and banks were allowed to fold, many banks would indeed evaporate. Others would reconfigure themselves, and some would thrive. The market would clear.

As difficult as it is to imagine, a few big failures would lead to a healthier scenario, in which our financial institutions are small enough not to cause catastrophe when they swoon.

But Washington prefers to keep things murky. No one in the U.S., or anywhere else, is going to have any idea of what the U.S. financial sector is really worth. The industry's values will move up, and prices will move down, but in a less reliable fashion than they would if markets alone were determining them. That means, as in Japan, that over time people will be wary of investing in it.

This Japanification ─ an America that is anxious but safe, or safe but anxious ─ may appeal to the president's Democratic constituents. It will offer the promise, but only the promise, of a place like America in the 1950S.

But Japanification isn't worth it, for it is more likely to yield an economy like Japan's in the 1990s, with an average growth rate of about 1.5 percent, than America's in the 1950s, when growth zipped along. By postponing dealing with many of our economic problems we are ensuring stagnation.

Economist Martin Feldstein is predicting average annual growth of 1.9 percent for the U.S. in the coming decade. That's already below the 3 to 4 percent averages that Americans used to take as their birthright in the days of Bill Clinton or before. But what proposals like Obama's effectively are saying is: we'd love 1.9 percent, but we'd be fine with 1 percent, or 0.5 percent, as long as there were no global economic crises. And that resignation is the most Japanese of all.

Amity Shlaes, senior fellow in economic history at the Council on Foreign Relations, is a Bloomberg News columnist. The opinions expressed are her own.

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