There is a lot of talk about the fact that the current credit crisis is unprecedented. This is not exactly true. Credit crises have occurred in the past and are currently in their earlier stages in other parts of the world. They all look very much like the one we are experiencing in the U.S. The fact that we have historical examples of similar issues is interesting but what is really fascinating is what solutions were tried and how effective they were.
In today’s article, I will run through a classic example of a credit crisis that occurred approximately 10 years ago in Japan. The similarity in the sequence of events between that crisis and the current one are marked. We can make this practical by evaluating the market’s reaction to that crisis as well as applying the model to emerging crises. The first part of this article will cover the series of events leading to the Japanese crisis and its American similarities.
In the next article I will walk through the results of the Japanese banking crisis and how that model may play out again in the U.S. I will also draw a correlation to an emerging crisis that should develop within the next year.
1970-1985 JPY: Massive banking deregulation in Japan
1989-2003 USD: Continued banking deregulation, expansion of FDIC to weak banks and changes to the Fed discount window
1895-1995 JPY: Real estate and other assets bubble
2002-2006 USD: Acceleration of real estate bubble and sub-prime lending
1994 JPY: Recognition of excessive bad debts by policy makers and first major bank failures
2006 USD: Recognition of excessive bad debts by policy makers and first major bank failures (NCFC)
1997 JPY: Credit crisis turns into a liquidity crunch and 3 major banks fail
2008 USD: Credit crisis turns into a liquidity crunch and several major banks fail
1997 JPY: Japanese government injects $90 trillion JPY into failing banks to ease credit problems
2008 USD: U.S. government proposes injection of $700 billion USD into failing banks to ease credit problems
Sounds uncannily similar now doesn’t it? In the next article, we will talk about what happened in Japan and what we should look for in the U S.
John Jagerson is the author of many investing books and is a co-founder of LearningMarkets.com and ProfitingWithForex.com. His articles are regularly featured on online investing publications across the web.