(written by Willy Yanto Wijaya — December 2008)
First Part: Overview of the Stock Market
The second (final) lecture by Prof. Murasawa highlighted the financial crisis that happens these days, and related it with some historical lessons in the past. He also compared it with the Japan’s experience in 1990’s after the burst of the bubble economy. So, one main question that will definitely arise is that what are the reasons behind this world financial crisis?
As a matter of fact, there are several factors that contribute to the financial crisis. One of the main factors is the collapse of the sub prime loan. This sub prime (below the standard) loan mostly comprises of loan in the real estate market. How is the story of this sub prime loan problems?
United States, with its capitalism economy, seemed so powerful to us in the past. Companies were pushed to keep increasing their market values, by keeping the constant increase of the stock prices. It is indeed a task of a CEO to keep pushing up the market value of a company, so as to make the shareholders happy by the investment profit gain. The CEO him/herself certainly will do this with all pleasure, since the salary he/she gain will also be increased along with the market value increase. Then, this case certainly applied as well at the real estates/ housings companies. To keep increasing the market value of the real estate companies, the sale of the real estates must keep going on. Consumers that actually didn’t need that housing were lured by the loan offers. Consumers that were actually not qualified to apply for the housing loans, were given the loans (sub prime loans). The financial institutions, such as banks, then squeezed out a huge amount of cash for this sub-prime loans. They expected that even though some risk of inability of payment from the debtor might occur, since housing prices were expected to keep increasing, the mortgage (base money value) of the loan might still be gained back. These banks then even sold these loan certificates to other security companies that gather funds from the public, companies and other sources. Everything seemed to keep growing. But the time of this sub prime loan problem eventually occurred1. Banks lacked of financial cash flow (stuck at the loans). Companies that relied heavily on bank loans such as automotive industries were severely affected. Security companies got problem with the public demanding back their money. Economic chaos and instability then aroused, and like the domino effect, it affected whole the world.
If we’d like to observe more deeply, we could see the analogous phenomena of this current situation of financial crisis with the one in 1930’s. Before the falling down of the stock prices of companies, there was usually the formation of bubble economy. US GDP increased by 40% from 1920-1929 before finally fell down steeply in 1934. This kind of phenomenon also occurred in Japan in the period of 1980’s. Nikkei value was about 10,000 in 1984 and then in just 6 years became almost 40,000 (almost 4 times gain) before finally fell down to the original value (about 10,000) in 1990’s2.
Therefore, anomaly in increasing growth did actually hide some suspected risk of being collapse in the future. That’s why Prof. Murasawa said that, the problem is not at the falling of the financial world, but the increasing growth.
1 Edmund L. Andrew, “Tracking the Bailout”, Summary of U.S. bailout efforts, The New York Times November 25, 2008.