The first lesson is that risks of financial and macroeconomic instability build up during asset price booms and materialize as an aftermath of asset price declines and recessions. In the light of Japan's experience, it seems to be a characteristic that the effects of a bubble are asymmetrically larger in the bursting period than in the expansion period.
This is also true for the USA. During the housing bubble of the 2000s, asset prices rose rapidly, fueled by easy credit and speculation. This led to a boom in the housing market, as people took out loans to buy homes that they could not afford. When the bubble burst, home prices plummeted and many people lost their homes to foreclosure. This led to a financial crisis and a recession.
The two main channels through which asset price fluctuations affect real economic activity are:
- Consumption: When asset prices rise, people feel wealthier and spend more money. This boosts economic activity.
- Investment: When asset prices rise, it becomes cheaper for businesses to borrow money to invest. This also boosts economic activity.
However, once the asset bubble bursts, the opposite happens:
- Consumption: When asset prices fall, people feel poorer and spend less money. This slows down economic activity.
- Investment: When asset prices fall, it becomes more expensive for businesses to borrow money to invest. This also slows down economic activity.
The effects of an asset bubble bursting can be severe:
- A recession: A recession is a period of economic decline, characterized by falling output, employment, and income.
- A financial crisis: A financial crisis is a period of financial instability, characterized by bank failures, runs on banks, and a decline in the value of financial assets.
- A depression: A depression is a severe recession, characterized by high unemployment, widespread business failures, and a decline in the value of assets.
The Japanese asset bubble of the 1980s:
- The Japanese asset bubble was a period of rapid asset price inflation in Japan, from the mid-1980s to the early 1990s.
- The bubble was fueled by easy credit and speculation.
- When the bubble burst in 1991, it led to a financial crisis and a recession.
- The Japanese economy has not fully recovered from the recession.
The US housing bubble of the 2000s:
- The US housing bubble was a period of rapid housing price inflation in the United States, from the mid-2000s to the early 2008.
- The bubble was fueled by easy credit and speculation.
- When the bubble burst in 2008, it led to a financial crisis and the Great Recession.
- The US economy has recovered from the Great Recession, but the housing market has not fully recovered.
Lessons learned:
- Asset price bubbles are a serious threat to financial stability and economic growth.
- Governments and regulators need to take steps to prevent asset price bubbles from forming and to mitigate the damage when they do burst.
- Individuals should be aware of the risks of asset price bubbles and should take steps to protect themselves financially.
Submitted May 15, 2023 at 06:15AM by Mobile-Yak-6412 https://ift.tt/j6YOuv1
