Thursday, July 3, 2014

Notes from 2013 Conference on 1929, Japan 1980s, Dot.Com Boom & Bust

The Conference began with a warm welcome by Arthur Hoffman the President of the Leir and Ridgefield Foundations. He noted that Bubbles or financial crises are evitable as long as there are banks and markets. However he did not see a bubble as occurring now because there is no optimism as compared to the atmosphere that existed between 2003 and 2007. He then quoted from the Leir Center’s book Boil, Bubble, Toil And Trouble about JP Morgan Chase’s ad for just having to “sign name” to get a home loan mortgage. He then concluded there was clearly a need for raising more cautions when bubbles do appear. 

Bill Rapp from NJIT then introduced the topics for the conference by giving an overview of the three great financial bubbles [1929, Japan 1980s, Dot.Com Boom & Bust] through the analytical lens about bubbles developed in the prior two conferences. His presentation and comments used data on broker loans in 1929 and compared this to the surge in credit issued in Japan during the 1980s. 

He also defined and measured these Bubbles by using the definitions for the different types of Bubbles developed in the previous two conferences, noting role of contracts and the legal system’s support as influencing these bubbles’ evolution including the three-sided optimism of borrowers, lenders and regulators that promoted these bubbles’ expansion and the use of leverage. This optimism created asymmetric incentives to enter into reciprocal contractual obligations where short-term optimism completely overwhelmed a longer-term view of what might happen when an over-expanded credit bubble finally collapsed. This asymmetry included government related actions and policies. 

He noted that in the case of these three great bubbles, the bubbles could have been easily seen even inside the bubble. This is because real asset prices rose sharply and dramatically with leverage also playing an important role in the process. Other contributing factors to the rapid price rise such as contracting were perhaps less clear or not emphasized in the historical record.