Title: Unit 6 : Boom and Bust

GTEE1112 : Introduction to Critical Reading

Group 5
Submitted to:
DR. PRADIP KUMAR MISHRA

Prepared by:
DANIEL JAMES
HUTOMO DANU SAPUTRO
HU XIAOJUN

AEN 140004
AEU 140702
CEB 110707

Content

Pages

Introduction

Similarities of the 2
reading

2-3

Differences of the 2
reading
New prespective
Conclusion
Reference

1. Economic Bubbles

2. Tulipomania

An 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.

1. Economic Bubbles

2. Tulipomania

a. Boom and Bust

Price 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 theory

Buyers 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.

1. Economic Bubbles

2. Tulipomania

c. Bankruptcy

Investors 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.

1. Economic Bubbles

2. Tulipomania

a. CASE
The 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 price

While the Tulipomania text shows us

about the specific case in the past
(1636) pertaining to the Economic
Bubble/Price Bubble case
Example: the fluctuative price of
Tulip bulbs affected botanist and
seller

b. Differences in speculation
Tulipomania speculates more than
The Economic Bubble text
just the greater fool theory but also
speculation
is
only
about
the latest events which was the thirty
greater fool theory
years war that just hit europe

No.12 The Bubble Burst and

Causes
Structuralbank 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 bubble

Non-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

Policy Issues for the Bank of Japan

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.2001Jul.2006; Dec.2008-)
--Inflation targeting? (Not adopted until 2013)
--New Dimension of Monetary Expansion (BOJ Kuroda, April
2013-)

Main causes of recovery (2003-2007)

Strong foreign demand (US, China)
Decade-long corporate restructuring effort
Yen 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 (20112012)
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 spending

Another 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/economicbubble-phenomenon