For asset-dependent, bubble-prone economies, a cyclical recovery – even when assisted by aggressive monetary and fiscal accommodation – is not a given.

Over the past six years, income-short consumers made up for the weak increases in their paychecks by extracting equity from the housing bubble through cut-rate borrowing that was subsidized by the credit bubble. That game is now over.

Washington policymakers may not be able to arrest this post-bubble downturn. Interest rate cuts are unlikely to halt the decline in nationwide home prices. Given the outsize imbalance between supply and demand for new homes, housing prices may need to fall an additional 20 percent to clear the market.

Aggressive interest rate cuts have not done much to contain the lethal contagion spreading in credit and capital markets. Now that their houses are worth less and loans are harder to come by, hard-pressed consumers are unlikely to be helped by lower interest rates.

Japan's experience demonstrates how difficult it may be for traditional policies to ignite recovery after a bubble. In the early 1990s, Japan's property and stock market bubbles burst. That implosion was worsened by a banking crisis and excess corporate debt. Nearly 20 years later, Japan is still struggling.

There are eerie similarities between the US now and Japan then. The Bank of Japan ran an excessively accommodative monetary policy for most of the 1980s. In the US, the Fed did the same thing beginning in the late 1990s. In both cases, loose money fueled liquidity booms that led to major bubbles.

Moreover, Japan's central bank initially denied the perils caused by the bubbles. Similarly, it is hard to forget the Fed's approach to the asset bubbles of the past decade, especially as the subprime mortgage crisis exploded last August.

In Japan, a banking crisis constricted lending for years. In the US, a full-blown credit crisis could do the same.