Title: Unit 6 : Boom and Bust GTEE1112 : Introduction to Critical ReadingGroup 5

Submitted to:DR. PRADIP KUMAR MISHRA

Prepared by: DANIEL JAMES AEN 140004 HUTOMO DANU SAPUTRO AEU 140702 HU XIAOJUN CEB 110707

ContentPagesIntroduction1Similarities of the 2 reading2 - 3Differences of the 2 readingNew prespectiveConclusionReference

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1. Economic Bubbles2. TulipomaniaAn economic bubble occurs when speculation in commodities, securities, real estate, or collectibles drives up prices well beyond the item's intrinsic value.An economic bubble about tulips, a variety of flower grown from bulbs and noted for their vivid colours and striking patterns that occured in the Netherlands in the 1630s.

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1. Economic Bubbles2. Tulipomaniaa. Boom and BustPrice become higher and when it reach it peak, it fall down sharply.Example: "dot-com"Price of tulip increase based on its colours and patterns, but the price fall in late 1636.Example: Semper Augustus b. Greater fool theoryBuyers justify the high price they pay by assuring themselves that they will find " a greater fool" that will pay more, or assume that rising trend has a momentum that will carry it higher.People pay extravagant prices for rarer varieties and this desire spread to middle class and apparently people would spend a fortune to acquire a single root of tulip.

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1. Economic Bubbles2. Tulipomaniac. BankruptcyInvestors that have less experience will easily face bankruptcy if invest on economic bubbles.In the late 1636, sellers panicked and sold at any prices because the tulip's price drop leading them to have less customer to buy the tulip's.

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1. Economic Bubbles2. Tulipomaniaa. CASEThe Economic Bubble text is about general case in order to educated us about the fluctuation of price in market price Example: commodities (Oil, gas), securities (stocks and bonds), real estate priceWhile the Tulipomania text shows us about the specific case in the past (1636) pertaining to the Economic Bubble/Price Bubble caseExample: the fluctuative price of Tulip bulbs affected botanist and sellerb. Differences in speculationThe Economic Bubble text speculation is only about greater fool theory Tulipomania speculates more than just the greater fool theory but also the latest events which was the thirty years war that just hit europe

No.12 The Bubble Burst and Recession

CausesStructuralbank deregulation and the loss of large corporate borrowers in the early 1980s led banks to overlend to risky borrowers (SMEs, real estate developers) without proper risk management.Monetaryas the yen rose sharply after 1985, the Bank of Japan injected liquidity to counter it and ease endaka fukyo (high-yen caused recession). This led to asset bubbles without igniting inflation.Consequences Excess investment in properties, over-expansion in capacity, lavish consumption, rise in outward FDI

Long adjustment after a large asset bubbleNon-performing loans (late policy response)Japans economic system became obsolete (*maybe)Aging population and associated problems (pension, medical care, dissaving, etc) (*)Snowballing fiscal debt (*)Peoples lack of confidence in the future or policy (*)Rise of China & other emerging economies (*)

Lack of political leadership to propose solutions, convince people, and implement actions(*) True even today

Coping with non-performing loans taking 10 years--Jusen problem: failure of nonbanks specializing in real estate loans (1995-96)--Bankruptcies of Yamaichi Securities & Hokkaido Takushoku Bank: credit crunch and mini bank runs (1997-98)--Bank recapitalization: public money injection, creation of Financial Services Agency (1998-2000)

Monetary policy for recovery unsuccessful--Injecting liquidity by buying up unconventional assets (corporate & bank bonds, etc): but the monetary transmission mechanism was broken (MBMoneyLending)--Zero interest rate policy (Feb.1999-Aug.2000; Mar.2001-Jul.2006; Dec.2008-)--Inflation targeting? (Not adopted until 2013)--New Dimension of Monetary Expansion (BOJ Kuroda, April 2013-)Policy Issues for the Bank of Japan

Main causes of recovery (2003-2007)Strong foreign demand (US, China)Decade-long corporate restructuring effortYen depreciation (up to 2007)

Lehman Shock and global recession (late 2008-2009)Traditional industrial exports (cars, electronics) which were leading recovery suddenly lost export markets.Thanks to strong demand in China and other emerging economies, growth picked up in 2010

Earthquake & tsunami (2011) and Euro Shock (2011-2012)Production fell temporarily in 2011 due to supply chain disruption and depressed psychology, but recovered soon due to the start of vigorous reconstruction investment.Recovery was fragile due to global recession (slowdown of emerging economies), yen appreciation, power shortage, etc.

An economic bubble is "trade in high volumes at prices that are considerably at variance with intrinsic values".It could also be described as a situation in which asset prices appear to be based on implausible or inconsistent views about the future.

Effect upon spendingAnother important aspect of economic bubbles is their impact on spending habits.

http://web-japan.org/factsheet/en/pdf/e04_economy.pdf

http://www.theeconomist.com/economic-bubble-phenomenon