Wednesday, October 8, 2008

They Just Cut Interest Rates

What will they do when rates are zero?

In the Japanese financial crisis of the 90's - the lost decade - where the stock market didn't recover for over a decade, they tried cutting rates to stimulate the economy – until they reached bottom. Instead of getting interest when people put their money in banks, they had to pay the banks. Call it negative interest rates.

Numbers of people who bought apartments during the real estate boom of the 80's just walked away finding it cheaper to rent, thus losing their entire investment.

In July, William Patalon wrote:

If you think the "Lost Decade" Japan endured during the 1990s was deep and painful, stick around: As the global financial crisis that was jump-started by the meltdown of the subprime mortgage market continues to unwind, the U.S. economy is headed for a financial Ice Age that will make Japan’s 10 wasted years seem like a single chilly night.

The two meltdowns started in much the same way - with busted stock-and- real-estate bubbles. With both the United States and Japan, the market manias were ignited by laughably loose credit policies, smoldered under a lack of oversight from government regulators, market analysts or such private-sector sentinels as credit-rating agencies, and were finally fanned into a frenzied financial conflagration by the promise of easy profits.

...

On Dec. 29 of that year (1989), the Nikkei 225 Index topped out at 38,957.44, before closing at 38,915.87. By the following September, it had nearly been halved - and there was still much more bloodletting to go (despite several subsequent rallies up over the 20,000 threshold, the Nikkei ultimately bottomed at 7,830 in April 2003. It closed yesterday - Wednesday - at 12,760.80, still down 67% from its trading high 19 years ago).

...

By early 2004, houses were selling at 1/10th their peak value, and commercial real estate was selling for less than 1/100th of its peak-market value.

More

It's going to be a long ride.

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