Two Generations of Asset Price Bubbles: From 1990 Japan to 2007 U.S. Eric Rashi.
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Transcript of Two Generations of Asset Price Bubbles: From 1990 Japan to 2007 U.S. Eric Rashi.
Two Generations of Asset Price Bubbles: From 1990 Japan to 2007 U.S.
Eric Rashi
What are Asset Price Bubbles?
0 An upward price movement over a period of time, unexplainable based on fundamentals, and which eventually implodes
0 Implosion associated to widespread socio-economic distress
0 Not a new phenomenon:
0 Irrationality: mania
0 Human psychology
0 Market manipulation
New More Modern Causes
Globalization
New Financial Architecture
Policy Mistakes
1
2
3
The Current Problem
0 “Greenspan” principle: policy-makers should not intervene in the markets to prevent bubbles, only clean up the mess once they burst
BUT…
0 Bubbles are very dangerous: history of leading to banking crises
0Japan 1985-1990 “Lost Decades”
0U.S. 2003-2007 Global Financial Crisis
Japan: From Asian Miracle to “Lost Decades”
19801982
19841986
19881990
19921994
19961998
20002002
20042006
20082010
2012
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
Real GDP Growth Inflation
Japan Real Estate Bust…
0 1990 real estate bust put pressure on banks’ balance sheets
19801982
19841986
19881990
19921994
19961998
20002002
20042006
20082010
0
50
100
150
200
250
300
Nominal GDP Land Prices
Rebased: 1980 = 100
Coupled with Equities Bust
0 Full-blown banking crisis:0 1992-1998: 21 Big Banks write of ¥42.02 trillion of bad loans0 Peak capital base during time period was only ¥22.15 trillion in 1994
1980 1985 1990 1995 2000 2005 20100
10,000
20,000
30,000
40,000
Nikkei 225
Causes of Japan’s Financial Bubbles
• From controlled to competitive market-based system
Banking liberalization
• Financial engineering (zaitech) enabled speculation
Financial innovation
• Cheap credit and high liquidity
Prolonged monetary easing
Japanese Government Response
0Underestimated crisis: too little, too late:
0Long-term measure: provide subsidies to failing banks
1980 1985 1990 1995 2000 2005 20100%
2%
4%
6%
8%
10%
Central Bank Interest Rate
19901991
19921993
19941995
19961997
19981999
20002001
-8%
-6%
-4%
-2%
0%
2%
4%
Fiscal Balance (% of GDP)
2008 U.S. Crisis : Similar Story?
0
50
100
150
200
250
Nominal GDP
S&P Case-Shiller Home Price Index
Rebased:1995 = 100
2002 2004 2006 2008 2010 20120
400
800
1,200
1,600
S&P 500
Spread to Real Economy
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
Real GDP Growth Unemployment rate
0 Full-blown banking crisis: heavily exposed banks are acquired or collapse
Causes of U.S. Housing Bubble
• Greenspan led deregulation: Gramm-Leach-Bliley Act 1999
Banking liberalization
• Mortgage market securitisation: tranching, CDOs, MBS, …
Financial innovation
• Cheap credit and high liquidity after 2001 dot-com bust
Prolonged monetary easing
U.S. Government Response
0Immediate and aggressive
0Pushed for “private sector solution” amongst banks
1995 2000 2005 20100%
2%
4%
6%
8%
Fed Interest Rate
20012002
20032004
20052006
20072008
20092010
20112012
-8%
-6%
-4%
-2%
0%
Fiscal Balance (% of GDP)
Main Takeaways
1) The Japanese and U.S. episodes are strikingly similar
2) Bubbles, particularly in real estate, can pose a serious threat to the real economy
3) “Greenspan principle” seems outdated:
Policy-makers need to contain spillovers (ex-post)
Also need to act proactively (ex-ante)
Preventing Future Asset Price Bubbles
• Continue with efforts: Basel III and U.S. Dodd-Frank Act
Re-regulation
• Understand complex products and reduce systemic risks
Keep up with financial innovation
• Monitor real estate prices and avoid low interest rates
Conservative monetary policy
Response to Future Asset Price Bubbles
0 U.S. response was more successful in containing damage from housing collapse and in returning economy to growth:
0 Must act quickly and aggressively
0 Must protect banks
Difficulties to Overcome
0 Preventing and reacting to bubbles is not an easy task:
1) Bubbles are difficult to establish ex-ante2) Reputational difficulties for policy-makers
0 But… given the threat, these difficulties must be overcome...
Questions?
Bubbles: difficult to establish ex-ante
1998 2003 20080
100
200
300
400
Chinese Property Price-to-Earnings Ratio
National Average Property Price
Urban Household Disposable Income per Capita
Rebased to 1998 = 100
U.S. Loan Delinquency Rate (% of total)
U.S. Gross Public Debt (% of GDP)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120%
20%
40%
60%
80%
100%
120%
Japan Public Debt (% of GDP)
19801982
19841986
19881990
19921994
19961998
20002002
20042006
20082010
20120%
50%
100%
150%
200%
250%