Did the Solutions to the Last Credit Crisis Work? (Part 1)

10/20/2008 12:01 am EST

Focus: STRATEGIES

John Jagerson

Co-Founder and Contributor, LearningMarkets.com

There is a lot of talk about the fact that the current credit crisis is unprecedented. This is not exactly true. Credit crises have occurred in the past, and are currently forming in earlier stages in other parts of the world. They all look very much like the one we are experiencing in the US. The fact that we have historical examples of similar issues is interesting, but what is really fascinating is what solutions were tried and how effective they were.

In today's article I will run through a classic example of a credit crisis that occurred approximately 10-years ago in Japan. The similarity in the sequence of events between that crisis and the current one are marked. We can make this practical by evaluating the market's reaction to that crisis, as well as applying the model to emerging crises. The first part of this article will cover the series of events leading to the Japanese crisis, and its American similarities.

In the next article I will walk through the results of the Japanese banking crisis, and how that model may play out again in the US. I will also draw a correlation to an emerging crisis that should develop within the next year.

1970-1985 JPY: Massive banking deregulation in Japan.
1989-2003 USD: Continued banking deregulation, expansion of FDIC to weak banks, and changes to the Fed discount window.

1895-1995 JPY: Real estate and other assets bubble.
2002-2006 USD: Acceleration of real estate bubble and sub-prime lending.

1994 JPY: Recognition of excessive bad debts by policy makers and first major bank failures
2006 USD: Recognition of excessive bad debts by policy makers and first major bank failures (NCFC)

1997 JPY: Credit crisis turns into a liquidity crunch and three major banks fail.
2008 USD: Credit crisis turns into a liquidity crunch and several major banks fail.

1997 JPY: Japanese government injects $90trillion JPY into failing banks to ease credit problems.
2008 USD: US government proposes injection of $700billion USD into failing banks to ease credit problems.

Sounds uncannily similar now doesn't it? In the next edition we will talk about what happened in Japan and what we should look for in the US.

By John Jagerson, of PFXGlobal.com and LearningMarkets.com.

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