If history is ever a lesson we should learn from it, maybe just once. True there are always economic cycles but bubbles are formed mainly due to one reason “Cheap Money”. More so, bubbles only really become apparent in hindsight. What we are encountering is nothing more than panic & volatility from the drunken stupor from cheap money.
Just look at the volatility, the price for oil rose 25% in a single morning, up 30% in 4 days. Gold is up 23% in 8 days. The NASDAQ rose 100 points yesterday and closed at the low, -94 points – today.
In the early 1980s Japan was awash in both a real estate bubble and stock market bubble. The Japanese stock market went from a high of approximately 39,000 back in 1989 and today is approximately 12,000. A generation was lost and almost two decades have gone by and still no end of sight.
Hopefully we can learn from history not to repeat the mistakes that Japan did in the late 1980s and early 1990s.
When Japan’s stock and property-market bubbles burst in the early 1990s, lenders were left with trillions of yen in bad loans on their books. Various types of bailouts were attempted…but to no avail. Japan, the world’s second-largest economy vacillated during their banking crisis. Japan, procrastinated in writing down bad loans which unnecessarily increased overall costs in terms of asset-price declines. The problems of stagnate economic growth was exacerbated by bailouts intended to wring speculative excesses from the stock and real estate markets.
Real GDP in Japan grew at an average of roughly 1.5% yearly between 1991-1999.nations. It wasn’t until 1999 – two years after the collapse of Yamaichi Securities Co. – that the Japanese found the political will to use taxpayers’ money to begin bailing out their banking system. The Japanese Government efforts to revive economic growth have really met with little success and were further hampered in 2000 to 2001 by the slowing of the global economy.
The only way to wring the excesses out of a bubble is to let market forces enter. Let the banks that were not prudent fail instead of bailing them out. Sounds harsh, but in times like these harsh measures might be the answer if we look at history.
Our Fed is trying to play the activist and is attempting/trying to stem the tide. However the question is BAILING OUT THE BANKS the answer?
By acting quickly, Can the U.S. avoid repeating Japan’s Depression?
Andrew Abraham
