After reading this book, I’m convinced that humans are programmed to not learn from history.
Devil Take the Hindmost: A History of Financial Speculation by Edward Chancellor covers financial speculation from Tulip Mania through the LTCM crisis of 1998. The book was published prior to the dot-com crash. Even though I found the early chapters a bit dry, the second half of the book provided an excellent overview to many of the financial disasters of the 20th century.
The most interesting chapter was Kamikaze Capitalism: The Japanese Bubble Economy of the 1980s. Listen to these characteristics of the Japanese economy at the end of the 1980s.
- Property values soared to records.
- Homes purchased with exotic loans (100-year mortgages).
- Low import prices kept inflation low.
- Rising asset prices caused an increase in spending (Wealth Effect).
- Cuts in income taxes.
- People borrowed against the equity of their homes.
- Consumer debt increased.
That list reads as if it were the United States from 2002-2007. After the bubble burst in Japan, they started a long period of deflation. I use the term deflation to mean a contraction of the money supply, not falling prices, which are a symptom.
What happened to Japan in 1990 looks like what is happening in America in 2008.
- Falling stock and real estate prices.
- Insolvent financial institutions.
- Banks with a growing amount of non-performing loans.
- Fear of risk and rush to Government Treasuries.
- Decreased consumer spending.
The Japanese spent over a decade attempting many failed policies to jump-start the economy. Unfortunately, this list looks familiar as well.
- Aggressive cutting of interest rates. This had the effect of foreigners borrowing money in Japan and exporting it to other countries to seek higher returns.
- Central bankers turned a blind eye to banks that wouldn’t write down bad debt.
- Fiscal spending packages (checks in the mail).
Almost a decade after the bubble burst in Japan, Standard and Poors estimated that Japanese banks still had bad loans of $1.1 Trillion USD. Perhaps Ben Bernanke would be wise to read this chapter. In a global economy where capital flows to seek the highest returns in a transparent marketplace, Japan’s 1990s is much more relevant than the United States’ 1930s.