Kuta Beach

Kuta Beach

Friday, 3 October 2008

Subprime Crisis and Japanese Banking Crisis


I am starting to worry that the Subprime Crisis in America may play out similarly to the Japanese Banking Crisis. In Japan, property prices and stock prices were rising rapidly until about 1990 when both crashed. The Nikkei 225 has not recovered to this day, as you can see on the graph above, which I obtained from Wikipedia. What this teaches is that the future is uncertain and that stock markets don't necessarily go up in the long run. One could argue that in the future the Japanese stock market will recover, but 18 years of stagnation for me is sufficient evidence to disprove the assertion that stock markets always go up in the long run. It reminds me of what economist John Maynard Keynes said: "In the long run we are all dead."

Some argue that in America the S&P500 always goes up in the long run and historical data proves this. Indeed it does, but before 1990 we could say the same thing about the Nikkei 225. Who is to say that the credit crunch in America now won't produce the same stagnation for the next 10 to 20 years that we saw in Japan?

The Subprime Crisis and the Japanese Banking Crisis were both similar in that they were triggered by a stock market and property market bubble that popped and resulting in a drying up of liquidity as banks refused to lend. The response of regulators in both Japan and the US were similar in that they both tried to restore liquidity by lowering interest rates. Regardless of the regulators' intentions to prop up the banks, most were too scared to lend.

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