We invited readers to send questions this week to Martin Wolf, the FT’s chief economics commentator. Here is the fifth question, from a reader who wishes to remain anonymous. Martin’s response is below.

Anonymous: With the government indirectly supporting asset prices, to what extent is the current economic situation like Japan’s at the start of their lost decade, and is it likely that a multi-year gentle deflation in assets prices may occur?

Martin Wolf: There are strong similarities between the situations today in the US and UK, in particular, and in Japan in the 1990s. Like Japan, the US and UK suffered large asset price bubbles, above all, in property. Like Japan, the US and UK had huge expansions in credit and a massive overleveraging of the financial sector. And, like Japan, the US and UK had to adopt unprecedented fiscal and monetary expansion to stave off a post-bubble collapse into a true depression. While the bubbles and excess leverage were smaller in the US and UK than in Japan, more of the world economy has been affected this time. That will make it far more difficult for the affected economies to export their way out of their difficulties. I expect the recovery to be weak and the need to sustain large fiscal deficits, to support demand, to be much greater than many now assume. At the same time, monetary policy has been much more aggressive, much sooner, in the US and UK than it was in Japan. So I do not expect a long-term deflation in consumer prices, as has happened in Japan. In the US, property prices have gone a long way towards completing their adjustment. This seems less true in the UK. Equity prices look a little overvalued again, but not extraordinarily so. So, on balance, I do not expect a multi-year deflation in asset prices. In the longer term, inflation seems a greater danger, if the US and UK cease to be able to sell public debt on favourable terms and the central banks are forced to buy most of it.

We invited readers to send questions this week to Martin Wolf, the FT’s chief economics commentator. Here is the second question, from Kevin P.Gallagher. Martin’s response is below.

Kevin P. Gallagher: In the US, and to some extent the EU, credit ratings agencies will remain largely unscathed in financial regulatory reform packages. How can we prevent another crisis, or mitigate one, without fundamental reforms of the CRAs?

Martin Wolf: It is scandal that the model of payment for the credit rating agencies has not been changed. They should be paid by agents for the buyers not by the sellers. More important, the regulatory role of ratings should be removed altogether. They have no credibility, in this regard. My own view is that, at best, ratings are a lagging indicator of what is happening in the market. At worst, they are actively misleading. Nobody should be required to hold assets of a particular grade. Will this failure cause another crisis? I don’t know. But it won’t help us avoid one, that is for sure.

Read Martin’s response to the first question – on income distribution and the crisis.

In depth coverage on rating agencies (FT)

We invited readers to send questions this week to Martin Wolf, the FT’s chief economics commentator. Here is the first question, from Dirk Brouwer of the Netherlands. Martin’s response is below.

Dirk Brouwer, Amstelveen, The Netherlands: How could a more equitable distribution of income be instrumental in solving the impact of this crisis? Especially in the UK and the USA the top 20% has close to 50% of the net incomes which is one of the reasons for the bubbles on Wall Street and on the housing market.

Martin Wolf: I am not at all sure about the link between inequality and the bubble. I think that the growth of the financial sector played an important role in increasing inequality in the US and UK. It helped a very small proportion of the population to extract a large amount of rent. But I am not sure about the reverse causal relationship from higher inequality to the bubble. The argument would, I suppose, be that, lacking higher incomes, a large proportion of the population borrowed in order to sustain consumption. This is possible. But I do not know of any convincing arguments for the proposition.

In any case, whatever the causal relationship, I cannot see how a more equitable distribution of income would now help solve the crisis. I suppose one might argue that it would increase sustainable consumption, though consumption already looks excessive in the US. I think one would have to argue, instead, that greater equality is a good in itself. The big question is how one could achieve it. There are limits, I think, to how much redistribution one can achieve through the redistribution of pre-tax incomes. So the aim should be to alter the distribution of pre-tax incomes themselves. I know of no easy way to do this, certainly not in the short run.