The Housing Bubble

Readers suggested a topic on the housing bubble and central bank policy. “This recession has been going on since approximately 2007 with no end in sight. Much has been written about Japan’s ‘Lost Decade.’ Are we in an American ‘Lost Decade’? Will it last longer than a decade?”

A reply, “Some have already labelled the first decade of the third millennium A.D. the lost decade for the American economy, beginning around the time of the tech stock crash.”

One said, “For us guys in the aerospace business, and a bunch of other ‘mature’ industries, the ‘Lost Decade’ started about 1986. Inflation corrected, I’m making less as a ‘Chief of Maintenance’ than I did as a newbie A&P back in 1979-80.”

“All this crap started rolling down here about 1980. Any correlation between the screwing of J6P America,the rise of Trickle-Down, Supply Sider Republican Theology and the purchase of the Federal Government by the Banksters and Corporations may be purely coincidental. Time to re-read ‘The Jungle’ and ‘The Grapes of Wrath.’ Back to the future, baby.”

From Reuters. “Call it a lost two years, and counting. The economic malaise afflicting industrialised economies on both sides of the Atlantic isn’t as long-lived as Japan’s lost decade yet. But as a distressingly weak U.S. June jobs report made clear on Friday, two years after a deep recession ended, central bankers have yet to engineer convincing recoveries.”

“Instead, wary of overusing the measures they have already rolled out, they find themselves waiting in the hope that these policies will be enough. ‘I’m a little bit more sympathetic to central bankers now than I was 10 years ago,’ U.S. Federal Reserve Chairman Ben Bernanke said with a faint smile when asked last month about earlier criticisms of Japanese policy.”

“Despite ultra-loose monetary policies, the Fed, the European Central Bank and the Bank of England all face lingering economic challenges. The Fed, far from launching a tightening cycle, has just completed the latest — and what it hopes is its last — round of large-scale bond buying. Not only has the Fed cut rates to near zero, it has tripled its balance sheet to more than $2.8 trillion from pre-crisis levels.”

“In spite of this, the Fed is falling well short of its mandate to ensure sustainable full employment, with unemployment at 9.2 percent in June and growth projected to remain sluggish. ‘The more the central banks pull the same rabbit out of the hat and it still doesn’t solve the problem, the higher is the risk that at some point the market will say, ‘We’ve seen that rabbit before… and maybe I won’t react as aggressively in response to your policy,’ said Torsten Slok, an economist for Deutsche Bank.”

“While an economics professor at Princeton University, Bernanke cricitized the Bank of Japan for poor policymaking, saying it was slow and inconsistent in responding to deflation. Japan’s economy sputtered for ten years in the 1990s after a real estate bubble burst and has never really recovered. Bernanke said in June that his main point in his comments about Japan was that a determined central bank can always do something about deflation. ‘I think it’s widely agreed that we succeeded in ending that deflation risk,’ he said.”

The Guardian. “HSBC’s Stephen King, Karen Ward and Madhur Jha have analysed the recovery plans of governments in major economies, and discovered an alarming theme: they are all banking on a rapid return to healthy growth to repair their balance sheets – and they’re unlikely to get it. King et al believe the current ’soft patch.’ which is not just affecting the UK but also the rest of Europe and the US, could in fact be something much worse: what they call ‘Japan lite.’”

“Since the 1980s credit-fuelled boom turned into a crash, Japan has battled its way through what was known as the ‘lost decade’ before it became clear that it would go on even longer – a prolonged period of sluggish growth, punctuated by dips into recession. Its debt-to-GDP ratio has continued to climb throughout this time – from 40% in 1996 to more than 200% today.”

“Leigh Skene, of Lombard Street Research, echoes HSBC’s fear that Japan could be the model the rest of the world’s economies end up emulating, despite policymakers’ determination not to repeat Tokyo’s perceived policy mistakes. Skene says the job of clearing up after the credit-fuelled chaos of the past decade has barely begun. ‘The repair of household balance sheets is in its infancy, zombie companies abound and bank balance sheets contain far too many toxic assets and far too little capital.’”

“There was a hint of this in the recommendations from the inaugural meeting of the Bank of England’s financial policy committee. Its members said they feared banks might be quietly extending loans they know will never be fully repaid – where a property is worth less than the mortgage secured on it, for example – without making their shareholders fully aware of what is happening. The recipients of the banks’ beneficence then become what Danny Gabay, of Fathom Consulting, calls ‘zombie households’ – technically insolvent but stumbling onwards.”

“As Ward puts it, ‘The point we’re making is that if you think about what went wrong with Japan, it was the fact that the fiscal issues were never addressed, and as the debt levels got bigger and bigger, the causality starts to reverse, and eventually, you get to the point where your recovery stalls, because you haven’t dealt with the debt problems.’”

The Guardian, September 8, 2008. “As the world frets over the three-day delay before US Congress meets again to debate a bail-out plan for Wall Street, it is worth remembering that it took Japan’s government several years to rescue its stricken financial institutions. Though there are significant differences between the two, Japan’s real estate and stock market meltdown of the 1990s offers lessons in how — and how not – to manage the kind of crisis now enveloping US banks.”

“When the asset-inflated bubble burst, over-generous Japanese lenders were left with masses of bad loans. From its 1989 peak of 38,916, the Nikkei stock average fell 63% during the 1990s; land prices slumped — a far cry from the days when the grounds of the imperial palace in Tokyo were rumoured to be worth more than all the real estate in California.”

“Helped by toothless regulators who turned a blind eye to their losses, the initial reaction was to simply do nothing while banks creaked under the weight of unrecoverable loans. Japanese banks started writing off their bad debts in the mid-1990s, but the government’s bail-out did not take hold until 1999, when the Resolution and Collection Corporation was formed to handle the disposal of bad loans.”

“But Tokyo’s bail-out package came at a price. Free to lend again, banks simply used funds to keep countless ‘zombie’ companies afloat, so great was the desire to avoid bankruptcy and mass unemployment.”

“Taro Aso, Japan’s new leader, this week cautioned the US against the procrastination that had prolonged his country’s banking crisis. ‘It is doubtful that we responded properly,’ he said. ‘The government action was slower and so the costs grew greater.’”

“Whatever congressional legislators decide on Thursday, they can’t say they haven’t been warned.”