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I think I'm turning Japanese, I Really Think So.

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Shocked into an inconsolable state, Presidential Candidate Hillary Clinton feared out loud yesterday that injecting liquidity into the economy might reduce the United States to the economic level of post 1990s Japan.

We might be drifting into a Japanese-like situation. I don't think we can work our way out of the problems we're in in the broad-based economy with monetary policy alone. I think the Japanese tried that and tried and tried that.

The phenomenon Mrs. Clinton is grasping for is the "Liquidity Trap." With interest rates so low that monetary authorities have no where left to go with rate cuts, and where the economy is stagnate, expectations for long term returns in, e.g., equity investment are low and market participants keep their assets in short-term vehicles or cash. This, of course, makes matters even worse.
Liquidity isn't the answer, you see. Instead, we have to use liquidity.
Details after the jump.


Specifically, Clinton's suggests that the government, or a proxy for the government (the FHA in this case), buy up mortgages where borrowers are underwater on equity. In typical Clinton fashion, the size of such a program wasn't discussed. This was probably a good thing, given that the best estimates put underwater mortgages in the United States at about $2 trillion.
Clinton is right about one thing, the answer to a liquidity trap is generally a "money gift." In Greenspan vocabularly, "Helicopter Money." You have to find non-bank ways to pour money into the economy. Back, "in the day," that is during the Great Depression, the Fed managed it by buying gold at significantly above market rates. Clinton has stolen a Great Depression concept, and cleverly worked to kill two birds with one stones. First, the Helicopter Money. Second, acquiring political capital by directing the gift at a demographic likely to vote for her: Homeowners daft and financially irresponsible enough to take on mortgages that required insanely optimistic assumptions about eternally rising asset prices to make economic sense. Of course, her charity is cast in the light of compassion, "fairness" and justice.
Far be it from us to point out that just because a homeowner is faced with negative equity, nothing is necessarily preventing them from making their payments, or preventing them from being back above water if asset prices recover. We would never point out that these particular "victims" don't seem like decent candidates for government assistance. They probably are in exactly the demographic that Clinton hopes to win away from other candidates for high office, however.
As for "turning Japanese," the Wall Street Journal might give us a clue there:

Clinton: March 12, March 14, March 20

Hmmm. Could be.
We don't have the heart to tell her what the song is actually about, however.

Clinton Fears Japan-Style Malaise

[WSJ]

-- Equity Q. Private is the Author of

Going Private

and a Guest Editor for DealBreaker.com

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I was scoring up the Super Bowl (small loss) when Ocean called. Ocean is a good customer. He had a couple questions, and I told him fire away. First he wanted to know if we were doing the Oscars again this year. Of course we are. I'm not thrilled about it –I'm half paranoid about inside information bubbling on the Internet, but I'm learning to embrace the inside mis-information. Most importantly, we do it as a service, so the customers won't start betting online with bookies in Costa Rica. Ocean was pleased. For what it's worth, he likes The Artist at very short odds. He watches rom-coms. With his wife, he says. His favourite movie though is Love Story, and he cries shamelessly every time he watches it: he truly believes that love means never having to say you're sorry. I've never figured that out. I'm forever apologizing to my wife for doing boneheaded things and saying stupid shit. And apologizing is a necessity But whatever. A happy customer is a beautiful thing. 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(I've never done anything more sophisticated than buy a put spread when I was afraid of a downturn. Go ahead, laugh.) 30's a lot. So I let him have it at 6-to-5. He was only expecting even money or slightly worse, so he was pleased. Ten minutes later I was using this episode as an object lesson for my Faithful Assistant, a guy who is muddling through an MBA while living in his parents' basement. Garage loft, I stand corrected. Anyway, good customers need to be kept happy, good customers lose, and happy customers pay. The Hollywood-movie days of kneecapping customers who stiff you were over before I was born, if they ever even existed, and—and the phone rang again. Ocean again, wanting an over/under number on where Apple would be in a couple months' time. Oh, and Facebook. I told him I would have to call him back. I started throwing coffee cups and in between my screams my Faithful Assistant told me he'd just pretend I have Tourette's. He's cold. Then he asked me what was going on. 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