How does the financial crisis in 2008 resemble the 1920's crisis?

Answer 1

AUTHOR: JAMES CHINEMELU NWAZUOKE

B. PHARM, UNIV. OF BENIN, NIGERIA

MBA, RMIT, MELBOURNE

PROJECT RESEARCH OUTLINE

1. EXECUTIVE SUMMARY-----------------------------------------------------------------PAGE 4
2. INTRODUCTION------------------------------------------------------------------------PAGE 5-6
3. LITERATURE REVIEW-------------------------------------------------------------------PAGE 7

3.1. CAUSES AND IMPACTS OF THE FINANCIAL CRISIS------------------PAGE 7

3.1.1. CAUSES------------------------------------------------------------- PAGE 7-11

3.1.2. IMPACTS------------------------------------------------------------ PAGE 12

4. ROAD TO RECOVERY--------------------------------------------------------------PAGE 13-15

5. CASE STUDIES------------------------------------------------------------------------PAGE 16-20

6. CONCLUSION-------------------------------------------------------------------------PAGE 21

7. REFERENCES----------------------------------------------------------------------------PAGE 22

1. EXECUTIVE SUMMARY

The global economic turndown has led to an unprecedented hardship in the lives of those that came after the great depression of the 1930s. The word financial crisis or global recession generally suggests a decline in economic activities, exceeding a period of six months

The root causes of the financial crisis have been suggested as bust in the housing bubble (an artificial inflation in real estate prices) and bust of commodity boom. Other causes of the current financial crisis include, Easy Credit, Sock Market Collapse, Dollar Crisis, Media Influence and Power- Mediocrity Grip.

A lot of governments worldwide are currently working round the clock, looking for ways to resolve the current financial crisis, a number of ways have been proposed and some have been adopted. Proposed solutions include Optimism, halting the circle of fear and inspiring hope in people, to believe that better days are around the corner. Another solution is curbing extravagance, advising as well as enforcing legislations that will enable people to live within their means. Economic Stimulations are already obvious in most countries of the world; the Obama administration had already pumped $800Billion in the economy so as to stimulate/revamp the economy. Merger and Cooperation involving equal partnership are encouraged; the new US-Russia alliance on Global Financial and Energy Securities is one way forward. Expansion of G8 to G20 and the current G20 summit held in London offers more and stronger participations.

Two case studies are considered here, to offer historical perspective and hindsight knowledge on the financial crisis--- The Great Depression of the 1930s in the US and around the world and the lost decade of the 1990s in Japan. The lessons learned from the great depression and the lost decades provides solid exist strategies to the current financial crisis.

In conclusion serious efforts should be undertaken to avoid unnecessary speculations giving rise to a series of bubbles, legislations should be on ground ensuring stricter restrictions within the financial sectors. It is also important to note that the most probable route to recovery from the crisis will involve an articulation of all the possible solutions

2. INTRODUCTION

The aim of this project is to identify the possible causes of the world's financial crisis and to extrapolate ways of recovering from the crisis. The world is currently experiencing an economic downturn and everybody is wondering what could be responsible.

The words 'financial crisis', 'the global meltdown', 'economic recession' are now used interchangeably, "A recession is defined as a prolong period of economic slowdown" (Vijay Ghosh, The Economic Recession Simplified).

The slow down is generally characterized by a slowdown in purchase of consumer goods, reduction in the production of goods, increase in unemployment and decrease in salaries and incomes and unhealthy stock market. The slowdowns generally have to be sustained for at least six months to be classified as a recession.

The recession is also likely to lead to baby bust as well as increases in abortion and consequently a reduction in world's population. "As individuals begin to feel the effects of the recession on their personal lives, commentators are wondering about the impact on the birth rate" (Jennie Bristow, Abortion Review, March 3rd 2009)

A recession could easily cause other loans going bad as well. Many economist on the right and left now argue that the only solution is for the federal government to step in and buy some of the unwanted debt, as the fed under the bush-Obama administration have started doing, otherwise called bailout

On the 15th of April 2009 thousands of people rallied on "tea parties" staging protests that tapped into the collective angst stirred up by bad economy, government spending and bailout. At the Iowa Capitol Doug Burnett lamented "this country has been on a spending spree for decades, a spending spree we can't afford" (Joe Biesk, Associated press, 15th April 2009)

Our financial system accelerates the human instinct to go wild during good times. Perhaps we need some automatic breaks (Daniel Gross, Newsweek, Feb. 28th 2009)

The money market that represents the market for short-term debt, which companies used to smooth out mismatches in their cash flows, is gradually running into extinction.

This project also aims at exposing the strong interrelationship and inter-dependence amongst nations. It calls for extra care in dealing with "issues" It holds nations of the world more accountable for their actions.

Gone are the days when a nation can freely and nonchalantly decide to run her affairs as she deems fit, as it will gradually and inevitably create a ripple effect that jeopardizes the fate of other nations.

The U.S. financial crisis quickly spread worldwide given the interconnectedness of the global economy in trade, finance and investments. The impact on and reaction from developed countries and emerging markets differ based on their global economic integration and policy responses.

(www. Brookings.edu/financial markets)

When the US sneezes, the world catches a cold. This adage of the twentieth century has never been truer than today (The European Magazine, the 2008 economic crisis explained).This truism by extension (due to the strong links amongst nations) has included many other nations of the world.

The question therefore is how did this monumental financial crisis erupt?

3. THEORIES/LITERATURE REVIEW

3.1. CAUSES AND IMPACTS OF THE FINANCIAL CRISIS:

3.1.1 CAUSES

Most scholars have argued that the chief and root cause of the global financial crisis started with

3.1.1.1 BURST OF THE HOUSING BUBBLE

In 2004, during the housing bubble, everyone; Lenders, Borrowers, Banks, Construction Companies, realtors seemed to be in for a big party, and lenders were beginning to lend to risky borrowers that will normally be incapable of repaying the loans. The idea of lending to borrowers that are likely to default on their loans, was that if they were unable to pay back their loans, then their assets (Houses) can be resold, but as expected most of the risky borrows could not afford to pay, but in putting too many foreclosed houses for sale at the same time, the over priced /inflated housing market plummeted. The unprecedented drop in housing prices proved fatal for most banks as they had already invested most of their money in the speculative deals. The sub prime mortgage was such that borrowers were charged low interest rate for the first few years and subsequently there was a drastic rise in the interest…… unsuspecting borrowers were oblivious of the "clauses" attached to the loans and they were simply told that they will easily refinance their mortgage in few years and still keep their interest rate low. "With banks whispering sweet encouragement, people bought homes they cannot afford, and now they are falling behind in paying their mortgages" (David Leonhardt Trying to explain the financial crisis, the financial express Mar. 25th 2008)

Hence the chief cause of the global Meltdown and the world's financial crisis…… was excessive Greed from US Lenders

Lord Myners, the British government financial services secretary, has said that British banks are partly to blame for the current global recession (Mathew Tanner, Banks and the Recession, Jan 26 2009)

Poor government regulation on UK's banks and financial institutions has also been blamed for the recession. The Golden days of huge bonuses in The US and UK and most other parts of the developed world led banks and other financial executives to lose a broader sense of the world around them.

A number of economists seem to agree that the main causes of the housing bubble that led to the burst are --agency problems, the mis-pricing of risk and the failure of securitization to distribute risks across the financial market (New York Times, Pressured to take on risk, Fannie Hit a Tripping Point Oct. 4th 2008)

2005 to 2006 was time to pay the piper who ultimately dictates the market. The interest rate on the sub prime mortgage has skyrocketed, and borrowers were unable to pay or refinance their loans. The Question here is; why is the whole world affected? The whole world comes into the picture because the world is now tied together in a common global economy.

The pipers here are the investors and banks that US lenders sold the debts to. Hence the US lenders were simply using other people's money the world over to fund the sub prime mortgages.

2007 ushered in the year of the credit crunch; by 2007 nearly 1.3 million US houses were subject to foreclosure, up 79% from 2006. The collapse of the sub prime lending market resulted in a credit crunch for consumers. "The combination of decreasing home prices and higher mortgage payments due to increase in the adjustable rate mortgage market caused a perfect storm' (Jason Maples, Personal Finance, Denver Business Journal. April 11th 2008)

"The freeze in the credit markets sent stock markets gyrating, caused the collapse of Bear Sterns, left the economy on the brink of the worst recession in a generation and forced the federal reserved to take its boldest action since the depression". (David Leonhardt Trying to explain the financial crisis, the financial express Mar. 25th 2008)

No one seems to know the mysterious owners of the worthless debts spread all over the world. But soon banks refuse to lend to each other resulting in little liquidity (Money) in the system otherwise termed credit crunch.

Ethan Harris a top Lehman Brothers Economist once warned "We are exposing parts of the capital market that most of us have never had of". Robert Rubin former treasury secretary and current Citigroup executive has said he hasn't heard of "liquidity puts" an obscure financial contract until they started causing big problems for Citigroup.

Ben Benanke himself has suggested that the only thing that can end the financial crisis is the end of the housing bust.

Firms are now hoarding cash instead of lending it, until they understand how bad the housing crash has become and how exposed they are to it. (David Leonhardt Trying to explain the financial crisis, the financial express Mar. 25th 2008)

Lenders are shutting the doors, the conservatism has gone so far that it is affecting many solid would be borrowers which is turn is hurting the broader economy and aggravating wall street fears

2008 brought in a wave of losses, it was the year of reckoning, by July 2008 the heat of the crisis approached a climax, banks and financial institutions around the world reported a whooping 435 billion dollar loss. Today banks can hardly get credits and are stock with bad assets, A number of banks and financial institutions the world over have declared bankruptcy, e.g. Freddie Mac, Fanny May and AIG in US, Northern Rock in UK and Fortis and Dexia in Belgium. A number of Countries such as Mexico, Venezuela, Argentina and more, with strong trading ties to the US are experiencing enormous economic contractions. China just posted (15th April 2009) the lowest GDP in a decade of only 6.1 growth rate. "The Japanese gross domestic product shrank 15.2 percent on an annualized basis. It marked a fourth straight quarter of contraction and the biggest decline since Japan began keeping records in 1955". (Bettina Wassener, New York Times, May 20th 2009)

IMF just (April 2009) released a gloomy growth forecast for Australia. Australia growth is expected to shrink -1.4% in 2009 (faster than the global average of -1.3%) and 0.6% in 2010

3.1.1.2 COMMODITY BOOM CAUSES BUST

The skyrocketing in oil prices at the mid-of -2008 was largely due to the increasing demands from emerging economies such as China and India which dramatically forced consumers in North America and Europe to pay more in order to fuel their cars and heat their homes.

The rise in oil prices at the mid-of -2008 shot food prices also to record high, because oil is needed to produce and transport food, leading to food riots in a number of countries.

The rise in oil price to 147USD a barrel almost completely ground economies in North America and Europe, by 30th September 2008 UK and Germany reported a zero growth for the past quarter and declared they will officially be in recession by the end of 2008.

The Center for Monitoring India Economy (CMIE) reported that prices of sugar are expected to start rising from June 2009 due to depletion of inventories that will inadvertently create a tremendous upward pressure.

The financial crisis can be explained as the product of the twin evil of the sub-prime mortgage and the unprecedented increase in oil price.

Other factors include, Easy Credits, Stock Market Collapse, Dollar Crisis and many more.

3.11.3 EASY CREDIT

Easy Credit is one of the major other factor that led to the global recession. Encouraged by the artificially low interest rates created by the US Federal Reserve people were encouraged to spend money they don't actually have, and buying assets over and over until nobody was sure if they were actually worth anything or not. Easy credit is at the heart of the crisis, most US citizens were spending money they don't have rather than living within their means

3.1.1.4 STOCK MARKET COLLAPSE

Panic and fear are everywhere in early 2008. An economic recession is now the topic on everyone's mind. Most of the world's stock market have already lost more than twenty percent of there value in the last couple of months. "The dramatic drop in stock market values signals a new bear market for domestic and international equities" (James William Smith, Navigating the economic crisis of 2008)

The inability of the US Federal Reserve chairman, Ben Bernake to see ahead of time and act decisively in response to the housing lenders sub prime mortgage problems in 2007, has been blamed as a major contributor to the 2008 financial crisis and consequently Global Meltdown.

It was a rough first quarter for the equity market in 2008. "The Dow was down 6.35%, S&P 500 lost 9.45% and the NASDAQ dropped 14.06% (Jason Maples, Personal Finance, Denver Business Journal. April 11th 2008)

3.1.1.5 DOLLAR CRISIS

Adding to the credit issues has been the steady decline of the dollar against other currencies world wide. As the federal deficit continued to spiral out of control foreign investors world wide are becoming reluctant to hold the Dollars in form of treasury notes.

"While a declining dollar makes US exports more attractive to the global consumers, the $9.4 trillion deficit (Costing the treasury more than $480 billion per year just in interest payments) has fueled fears of solvency by global investors" (Jason Maples, Personal Finance, Denver Business Journal. April 11th 2008)

3.1.1. 6 MEDIA INFLUENCE

A lot of people have strongly accused the Media as been instrumental to the recession. Kevin Phillips a former white house strategist and author of 13 books including " American Theocracy" and "bad money" also condemns the media for failure to tell the public "how big and out of control" the financial sector became for the past 25years

"As the financial sector of the U.S. economy grew from about 10 percent to 12 percent to about 20 percent to 21 percent, the speculation led to a series of bubbles from savings and loans to junk bonds in the 1980s to the technology bubble in the 1990s to the mortgage, debt and credit bubble which has led to a "massive de-leveraging and unwinding" that is still being played out" (Kevin Phillips, Bad Money). Phillips argues that all the while the media was aware of all these economic malpractices but like the rest of the US politicians remained complicit.

3.1.1.7 POWER- MEDIOCRITY GRIP

The gross power imbalance between the developed and developing world has also been blamed as having a contributing role to the crisis. The idea of the more developed world, more or less dictating to the developing world, calling the shots and naming the rules of the game have not helped in advancing the 'financial course' of humanity but rather have metamorphosed to a dependence of developing nations on the West (Developed nations). UN, WHO World Bank, IMF is largely controlled by the West, countries in Asia, Latin America, and Africa have negligible control on the world's financial instruments, the developing nations lack any solid voice, hence their interests are not adequately represented in the 'world's financial market', but the effects of the crisis are felt by all. The grip of the first world (more developed world) on the third world (developing nations) have led to a power-mediocrity grip

3.1.2 IMPACTS

3.1.2.1 BOEING AND US STEEL

Mammoth companies such as Boeing and US steel have both had tremendous lay-offs recently, companies such as McDonalds and Wal-mart are however still resilient in the face of the crisis

3.1.2.2 CHRYSLER

Chrysler lenders are considering plan for debt offer. "Chrysler LLC's lenders are in talks with US government to reduce the automaker's debt by swapping some of it out of equity, new debt or lesser amount in cash (Reuters, April 3rd 2009, New York) Chrysler is currently surviving on the $4 billion dollar emergency loan from the US government and has been given a 30 days ultimatum by the Obama's administration to complete an alliance with Italy's Fiat SpA or face a cut-off of its government funding that could force its liquidation. "They tell me, 'The only way that we can survive is if you order cars, and Fiat and the government see money coming in,' " Mr. Archer said (Nick Bunkley, New York Times, May 22nd 2009) Robert Archer, runs three Chrysler dealerships in the Houston area.

3.1.2.3 GENERAL MOTORS

General motors corps. Share plunged by 16 percent in April (Reuters, 14th April, Detroit). Traders are shedding positions as they fear the US government will push General Motors into bankruptcy to wipe out existing equity.

The US government is laying the groundwork for General Motors to file for bankruptcy should it fail to reach give-back deals with stakeholders by the June 1st 2009 deadline (New York Times, GM to prepare for Bankruptcy Filing April 12th 2009)

4. THE ROAD TO RECOVERY

The road to recovery is a component of several factors, which include but not limited to:

4.1. OPTIMISM

One way of dealing with the current crisis is from a meta-physical standpoint, people need to believe again. Fear has suddenly gripped people across the globe, the psychological impact is traumatic, and there is the need for people to believe again. Here, we are looking at what hope does to the mind, the ability to awaken the "inner man" and bring out the true genius in us.

4.2. CURBING EXTRAVAGANCE

There is need for a global orientation especially for the richer nations of the world to live according to (and not in excess of) their means.

4.3. ECONOMIC STIMULATION

Governments of the world are taking steps to stimulate and revamp the economy, the US under the Obama administration passed a historically unmatched 780 billion dollars in Stimulus Bill. The Wall Street says it needs bailout, but what happens if Wall Street collapses completely? The inevitable consequence will be "a drying up of the system" "There is no industry in America that does not depend upon Wall Street. If credit seizes up and the banks fail, everyone will suffer deeply as businesses cut back for lack of capital, mortgage capital dries up, credit card rates rise and car loans become hard to get" (Megan McArdle, Asymmetrical information, the Atlantic, September 22nd 2008). Fruits of the economic stimulation are becoming evident. "The recent bounce in the stock market more than 20% from its march lows-has everyone looking for more signs of a stabilizing economy" (Dan Caplinger, The Crystal Ball That Could Make You Rich, April 7th 2009)

4. 4. MERGERS AND COOPERATION

The G-20 summit March 30th 2009 offer new hope of a collective determination in dealing with the financial crisis. The new forged alliance between the US and Russia for Global Financial and Energy Security offers promise for new models of cooperation aimed at long term solution.

"Partnership and cooperation amongst nations is not a choice, it is the only way" (Barrack Obama, 24th July 2008, Berlin Germany)

"True partnership and progress requires constant work and sacrifice" (Barack Obama, 24th July 2008, Berlin Germany)

4.5. NEED FOR WORLD PEACE

The need to create stable democracies and sustainable peace round the world can never be over-emphasized. Tremendous amounts of world resources (human, intellectual and natural) are lost yearly to wars and civil unrest. The war in Iraq and Sudan, the nuclear threat and proliferation in Iran, the distrust of the US in Venezuela, the kidnapping of expatriates in the Niger Delta region of Nigeria, the tirades of attacks by pirates on sea have all led to the fluctuations in oil prices

4.6. LEGISLATIONS

A. Stronger regulations should be adopted on financial documents such as: commercial paper, Accommodation Endorsement and Accommodation Paper

4.6.1 Commercial Paper

Commercial Papers are unsecured short term-debt issued to corporations, typically for financing accounting receivables, inventories and meeting short term liabilities, issued at a discount with maturity of about 270 days (www.investopedia.com). Commercial papers usually go without any collateral and are not registered with securities and exchange commissions (SEC) as long as it matures within 9 months 270 days

4.6.2 Accommodation Endorsement/Accommodation Paper

Regulations on written agreement from one entity to back the credit liability of another otherwise termed accommodation endorsement should be stiffen. This insurance is usually done with many considerations, and adds strength to the credit worthiness of the insured entity. This should normally be made by a parent company to a subsidiary, so as to allow the subsidiary company to take on the parent credit standing. Accommodation endorsement is similar to a government guaranteeing a third party's debt with his full faith and credit. For example an adolescence that does not qualify for a credit card may obtain one if the parent or guardian co-signs. In contributing to the global meltdown, Banks in the US and in some other countries have long borrowed money the world over, using their credit worthiness. But following the real estate boom of 2004 in the US bank executives became excessively greedy and went in for the kill. They started lending to risky-borrowers, the normal calculation would have been that if the borrower fails to pay his/her house will be foreclosed, sold at a profit. But unfortunately the boom was unsustainable and following the bust (meaning the houses will now be sold at a lower price than the original amount) couple with the inability of borrowers to pay back, banks stood at the crossroads, at a very precarious position and unimaginable nightmare that defiled any quick solution

4.6.3. REGULATIONS ON EXECUTIVE THEFT

There is the need for stronger regulations against executive theft, although white collar crimes are unlawful, executive theft appears to be within the ambits of the law and is only a matter of morality. Governments of the world most enforce stringent legislation that forbids CEOs and other executives from excessive enrichment of their pockets to the detriment of the society.

Imagine a CEO who is ready to spend 70,000USD of taxpayer money for ONE dinner, not to mention the endless travel (interstate and overseas), lengthy sabbaticals (overseas of course), retreats at luxury resorts (not with chateau cardboard of course!), overly generous and dishonest superannuation,

5. CASE STUDIES

The great depression of the 1930s in US is a valuable case in hindsight as well as the "lost decade" of the 1990s in Japan.

5.1. GREAT DEPRESSION

Lessons should be learned from history--the great depression of the 1930s offers a hindsight perspective on the current economic/financial crisis.

The Great Depression was a worldwide economic downturn starting in most places in 1929 and ending at different times in the 1930s or early 1940s for different countries. (Wikipedia). The Great Depression signaled the largest and most important economic depression in the 20th century, and is used in the 21st century as an example of how far the world's economy can fall.

The Great Depression was triggered by a sudden, total collapse in the stock market. The stock market turned upward in early 1930, returning to early 1929 levels by April, though still almost 30 percent below the peak of September 1929. Together, government and business actually spent more in the first half of 1930 than in the corresponding period of the previous year. But consumers, many of whom had suffered severe losses in the stock market the previous year, cut back their expenditures by ten percent, and a severe drought ravaged the agricultural heartland of the USA beginning in the summer of 1930.

In early 1930, credit was ample and available at low rates, but people were reluctant to add new debt by borrowing (Charles Hugh Smith, the coming great depression, leaving Fantasyland, November 29 2008) By May 1930, auto sales had declined to below the levels of 1928. Prices in general began to decline, but wages held steady in 1930, then began to drop in 1931.

5.1.1 LESSONS TO LEARN FROM THE GREAT DEPRESSION

One crucial lesson from the 1930s is that a small fiscal expansion has only small effects.

The key fact is that while Roosevelt's fiscal actions were a bold break from the past, they were nevertheless small relative to the size of the problem. When Roosevelt took office in 1933, real GDP was more than 30% below its normal.

The result was that the total fiscal expansion in the 1930s was very small indeed. As a result, it could only have a modest direct impact on the state of the economy.

This is a lesson the Administration has taken to heart. The American Recovery and Reinvestment Act, passed less than thirty days after Roosevelt's Inauguration, is simply the biggest and boldest countercyclical fiscal action in history. The nearly $800 billion fiscal stimulus is roughly equally divided between tax cuts, direct government investment spending, and aid to the states and people directly hurt by the recession. The fiscal stimulus is close to 3% of GDP in each of the next two years.

A second key lesson from the 1930s is that monetary expansion can help to heal an economy even when interest rates are near zero.

The United States was on a gold standard throughout the Depression. Part of the reason the Federal Reserve did so little to counter the financial panics and economic decline was that it was fighting to defend the gold standard and maintain the prevailing fixed exchange rate. In April 1933, Roosevelt temporarily suspended the convertibility to gold and let the dollar depreciate substantially. As a result large quantities of gold flowed into the U.S. Treasury from abroad. These gold inflows serendipitously continued throughout the mid-1930s, as political tensions mounted in Europe and investors sought the safety of U.S. assets.

Under a gold standard, the Treasury could increase the money supply without going through the Federal Reserve. It was allowed to issue gold certificates, which were interchangeable with Federal Reserve notes, on the basis of the gold it held. When gold flowed in, the Treasury issued more notes. The result was that the money supply, defined narrowly as currency and reserves, grew by nearly 17% per year between 1933 and 1936

This monetary expansion couldn't lower nominal interest rates because they were already near zero. What it could do was break expectations of deflation.

Beneficial impact on consumer and firm behavior was a turned around on interest-sensitive spending. For example, car sales surged in the summer of 1933. One sign that lower real interest rates were crucial is that real fixed investment and consumer spending on durables both rose dramatically between 1933 and 1934, while consumer spending on services barely budged.

a third lesson from the Great Depression: beware of cutting back on stimulus too soon. Monetary policy was very expansionary in the mid-1930s. Fiscal policy, though less expansionary, was also helpful. Indeed, in 1936 it was inadvertently stimulatory.

The fourth lesson to draw from the recovery of the 1930s is that financial recovery and real recovery go together. When Roosevelt took office, his immediate actions were largely focused on stabilizing a collapsing financial system. He declared a national Bank Holiday two days after his inauguration, effectively shutting every bank in the country for a week while the books were checked. This 1930s version of a "stress test" led to the permanent closure of more than 10% of the nation's banks, but improved confidence in the ones that remained. Nevertheless, the immediate actions to stabilize the financial system had dramatic short-run effects on financial markets. Real stock prices rose over 40% from March to May 1933, commodity prices soared, and interest-rate spreads shrank, the actions surely contributed to the economy's rapid growth after 1933, as wealth rose, confidence improved, and bank failures and home foreclosures declined. But, it was only after the real recovery was well established that the financial recovery took firm hold. Real stock prices in March 1935 were more than 10% lower

The fifth and final lesson to draw from the 1930s is perhaps the most crucial. A key feature of the Great Depression is that it did eventually end. Despite the devastating loss of wealth, chaos in the financial markets, and a loss of confidence so great that it nearly destroyed Americans' fundamental faith in capitalism, the economy came back. Indeed, the growth between 1933 and 1937 in US was the highest ever experienced outside of wartime.

This fact should give Americans and people of the world hope. The US is starting from a position far stronger than it was in 1933. And, the policy response has been fast, bold, and well-conceived. If the US and the world continue to heed the lessons of the Great Depression, there is every reason to believe that the world will weather this trial and come through to the other side even stronger than before.

5.2 LOST DECADE OF THE 1990s IN JAPAN

Japanese asset price bubble was an economic bubble in Japan from 1986 to 1990, in which real estate and stock prices greatly inflated. The bubble's collapse lasted for more than a decade with stock prices bottoming in 2003, until hitting an even lower low amidst the current global crisis in 2008.

In the decades following World War II, Japan implemented stringent tariffs and policies to encourage people to save their income. With more money in banks, loans and credit became easier to obtain, and with Japan running large trade surpluses, the yen appreciated against foreign currencies. This allowed local companies to invest in capital resources much more easily than their competitors overseas, which reduced the price of Japanese-made goods and widened the trade surplus further. And, with the yen appreciating, financial assets became very lucrative.

With so much money readily available for investment, speculation was inevitable, particularly in the Tokyo Stock Exchange and the real estate market. The Nikkei stock index hit its all-time high on December 29, 1989 when it reached an intra-day high of 38,957.44 before closing at 38,915.87. Additionally, banks granted increasingly risky loans.

Prices were highest in Tokyo's Ginza district in 1989, with choice properties fetching over 100 million yen (approximately $1 million US dollars) per square meter ($93,000 per square foot). Prices were only marginally less in other large business districts of Tokyo. By 2004, prime "A" property in Tokyo's financial districts had slumped to less than 1 percent of its peak, and Tokyo's residential homes were less than a tenth of their peak, but still managed to be listed as the most expensive in the world until being surpassed in the late 2000s by Moscow and other upstarts. Tens of trillions of dollars worth were wiped out with the combined collapse of the Tokyo stock and real estate markets. Only in 2007 had property prices begun to rise; however, they began to fall in late 2008 due to the financial crisis.

With the economy driven by its high rates of reinvestment, this crash hit particularly hard. Investments were increasingly directed out of the country, and manufacturing firms lost some degree of their technological edge. As Japanese products became less competitive overseas, the low consumption rate began to bear on the economy, causing a deflationary spiral. The Japanese Central Bank set interest rates at approximately zero. When that failed to stop deflation some economists, such as Paul Krugman, and some Japanese politicians, advocated inflation targeting.

The easily obtainable credit that had helped create and engorge the real estate bubble continued to be a problem for several years to come, and as late as 1997, banks were still making loans that had a low probability of being repaid. Loan Officers and Investment staff had a hard time finding anything to invest in that would return a profit. They would sometimes resort to depositing their block of investment cash, as ordinary deposits, in a competing bank, which would bring howls of complaint from that bank's Loan Officers and Investment staff. Correcting the credit problem became even more difficult as the government began to subsidize failing banks and businesses, creating many so-called "zombie businesses" The time after the bubble's collapse which occurred gradually rather than catastrophically, is known as the "lost decade" or end of the century in, Japan. In October 2008 the Nikkei 225 stock index reached a 26-year low of 6994.90.

5.2.1 LESSONS TO LEARN FROM JAPAN LOST DECADE

"The Japanese have been here before. They endured a "lost decade" of economic stagnation in the 1990s as their banks labored under crippling debt, and successive governments wasted trillions of yen on half-measures. " (Hiroko Tabuchi, In Japan's Stagnant Decade, Cautionary Tales for America, New York Times, Feb 12th 2009)

Only in 2003 did the government finally take the actions that helped lead to a recovery: forcing major banks to submit to merciless audits and declare bad debts; spending two trillion yen to effectively nationalize a major bank, wiping out its shareholders; and allowing weaker banks to fail.

By then, Tokyo's main Nikkei stock index had lost almost three-quarters of its value. The country's public debt had grown to exceed its gross domestic product, and deflation stalked the land. In the end, real estate prices fell for 15 consecutive years.

Some students of the Japanese debacle say they see a similar train wreck heading for the United States. "I thought America had studied Japan's failures," said Hirofumi Gomi, a top official at Japan's Financial Services Agency during the crisis. "Why is it making the same mistakes?"

Many American critics of the plan unveiled Tuesday by Treasury Secretary Timothy F. Geithner said the plan lacked details. Experts on Japan found it timid - especially given the size of the banking crisis the administration faces.

"I think they know how big it is, but they don't want to say how big it is. It's so big they can't acknowledge it," said John H. Makin, an economist at the American Enterprise Institute, referring to administration officials. "The lesson from Japan in the 1990s was that they should have stepped up and nationalized the banks."

Instead, the Japanese first tried many of the same remedies that the Bush administration tried and the Obama administration is trying - ultra-low interest rates, fiscal stimulus and ineffective cash infusions, among other things. The Japanese even tried to tap private capital to buy some of the bad assets from banks, as Mr. Geithner proposed.

6. CONCLUSION

In conclusion serious efforts should be undertaken to avoid unnecessary speculations giving rise to a series of bubbles, legislations should be on ground ensuring stricter restrictions within the financial sectors. It is also important to note that the most probable route to recovery from the crisis will involve an articulation of all the possible solutions

7. REFERENCES

1. Vijay Ghosh, the Economic Recession Simplified
2. Jennie Bristow, Abortion Review, March 3rd 2009
3. Biesk, Associated press, 15th April 2009
4. Daniel Gross, Newsweek, Feb. 28th 2009)
5. Brookings.edu/financial markets
6. The European Magazine, the 2008 economic crisis explained.
7. David Leonhardt Trying to explain the financial crisis, the financial express Mar. 25th 2008)
8. Mathew Tanner, Banks and the Recession, Jan 26 2009)
9. New York Times, Pressured to take on risk, Fannie Hit a Tripping Point Oct. 4th 2008)
10. Jason Maples, Personal Finance, Denver Business Journal. April 11th 2008)
11. David Leonhardt Trying to explain the financial crisis, the financial express Mar. 25th 2008)
12. James William Smith, Navigating the economic crisis of 2008)
13. Reuters, April 3rd 2009, New York
14. Nick Bunkley, New York Times, May 22nd 2009
15. Megan McArdle, Asymmetrical information, the Atlantic, September 22nd 2008
16. Dan Caplinger, the Crystal Ball That Could Make You Rich, April 7th 2009)
17. Hiroko Tabuchi, In Japan's Stagnant Decade, Cautionary Tales for America, New York Times, Feb 12th 2009