There's an old joke about a politician's plea for a one-handed economist, one who can't say, "but on the other hand . . ." Obviously, the pol wasn't dealing with a financial crisis, because there is a pretty powerful consensus on the best way to handle those. From 1980-1996, 133 out of the 181 members of the International Monetary Fund had major banking-sector problems. In the last 15 years, Britain, France, Sweden and the United States have had their own crises.
That is what makes Japan's response to its financial meltdown during the 1990s so surprising. Such things aren't too hard to figure out.
There is widespread agreement on the causes of financial crises. It goes like this: Liberalization of the finance sector and the maturation of big, low-risk corporations squeeze bank margins. The banks then go after higher-risk borrowers to increase profits, but because the financial sector has been coddled for so long, they are incapable of assessing credit risks. (Sometimes banks are encouraged to look the other way when questionable borrowers ask for money.) Deposit insurance further encourages risky lending.
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