References for the Economic Crisis

by Krishna on October 20, 2008

This is an article from the New York Times about the property bubble in Japan in the late 1980’s, written back in 2005 when the US real estate boom was probably at its peak:

JAPAN suffered one of the biggest property market collapses in modern history. At the market’s peak in 1991, all the land in Japan, a country the size of California, was worth about $18 trillion, or almost four times the value of all property in the United States at the time.

Then came the crashes in both stocks and property, after the Japanese central bank moved too aggressively to raise interest rates. Both markets spiraled downward as investors sold stocks to cover losses in the land market, and vice versa, plunging prices into a 14-year trough, from which they are only now starting to recover.

Now the land in Japan is worth less than half its 1991 peak, while property in the United States has more than tripled in value, to about $17 trillion.

This is the Nikkei stock market index for the Tokyo Stock Exchange. As you can clearly see, the peak of around 39,000 was attained in 1989. Almost 2 decades later, it stands at 9000, falling from a recent peak of 18000.


And most of you would be familiar with the Nasdaq index which peaked at around 4800 and is 1770 today.

The excellent authoritative economist on bubbles has been Robert Shiller. He predicted the technology bubble in his book “Irrational Exuberance” and later updated it to cover the housing crisis in the next edition.

I wonder which person is buying this book today (still selling at Amazon for $16). The sub-title reads “The Boom Will Not Bust and Why Property Values will Continue to Climb Through the End of the Decade — And How to Profit from Them” [emphasis mine]. Talk about wrong predictions!



Sam Santhosh November 8, 2008 at 9:53 am

It is really funny how the so called 'experts' keep making predictions and the coverage they get. Typically most of the predictions are very linear ones - many experts were predicting just last year the Indian sensex to get to 36,000 and the oil price to cross $200!

However some writers are refreshingly different - take a look at the 'Black Swan - Effect of the highly improbable' by Nicholas Taleb

Btw, good blog Krishnakumar!



Krish November 8, 2008 at 10:57 am

Thanks for your comment, Sam.

I agree with you about Nassim Taleb. Both his books have explained the potential of the unexpected event to create great fortunes or catastrophes.

His take is a little different from Schiller. Schiller said that both the stock and real estate market booms were unsustainable and had no basis in change of underlying fundamentals.

I felt that Taleb, for some reason, did not go so far to predict a crash, but suggested that if there was a crash, it would be extremely harmful and one has to be very careful about the potential risk. And he denounced investors who failed to take this into account.

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