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ERES 2009 Stockholm, Sweden Haven

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- Asian Financial Crisis Slow Government ... Asian Financial Crisis Slow Government Response?! - Japan Lost Decade ... the effect of the strong currency : 1980 ... – PowerPoint PPT presentation

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Title: ERES 2009 Stockholm, Sweden Haven


1
ERES 2009 Stockholm, Sweden Havent Learnt from
Past? A Common Symptom of Asset Bubble
Implosions section 6-B (1) Cycles and Crises,
Room Q34
  • CY YIU, Sherry YS Xu and Coune YJ Cao
  • Department of Real Estate and Construction
  • The University of Hong Kong
  • 25 June 2009

2
Research Questions
  • Can Asset Price Bubble Implosions
  • be predicted?
  • If yes, can it be prevented?

3
Predatory Lending?
Market Plummets
Sub-prime Crisis
Financial Institutions Quake
Global Financial Tsunami
DIRECT REAL ESTATE
Mortgages / Collaterals
MBS / REITs / ABS
CDO / CDS / Minibonds
4
Credit Ratings?
?
AAA
DIRECT REAL ESTATE
MBS/REITs/ABS
CDO / CDS / Minibonds
MORTGAGE
5
Other suggested causes
  • Irrational Exuberance?! - dot-com bubble
  • Contagion?! - Asian Financial Crisis
  • Slow Government Response?! - Japan Lost Decade
  • Greediness?!
  • Globlization?! Deregulation?!
  • Saving too much?! Spending too much?!
  • Unknown?! No cause?!
  • Every bubble implosion has a unique cause?
  • Is there any common symptoms?
  • Any tests conducted across bubbles?

6
Causes of Asset Price Bubbles
  • Irving Fisher (1911), John M. Keynes (1936),
    Milton Friedman (2003)
  • Asset Price
  • Interest Rate, Inflation Rate, Risk Premium,
    Expected Growth
  • Money/Credit Supply and Demand,
  • Information Asymmetry and Availability,
  • Risk Assessment and Leverage,
  • Expectations and Regulatory.

7
Whats New?
Pre-emptive Policy
Information Asymmetry and Availability
Moral Hazard
Risk Assessment or Leverage
Credit Ratings
Credit Derivatives
Bubble-Credit Spiral
Global Fund Flows
Shadow Banking
Scarcity of Resources
Savings
SIVs
Money/Credit Demand
Money/Credit Supply
Exchange Rate
Trade Surplus / Deficit
Permanent Income Growth
Fiat Money
Short Term Interest Rate
Long Term Interest Rate
Expectations / Experience
Bank Money
8
What is a bubble?
  • A bubble is defined as
  • an upward price movement over an extended period
    of 15 to 40 months that then implodes. and
  • in the 20th Century most of the manias and
    bubbles have centered on real estate and stocks.
  • (Kindleberger and Aliber, 2005)
  • magnitude of change of the asset price exceeds
    40

9
A study across 3 bubbles
  • Japan (The Lost Decade) in 1989,
  • Hong Kong (Asian Financial Crisis) in 1997,
  • The US (Subprime Crisis) in 2008.
  • Any common symptoms across the 3 bubbles,
    happened in 3 cities, in 3 decades, and of 3
    different causes.

10
Japan Land Price Bubble
Up from 60 to 126 (?110) in 11-year time, and
then dived into 72 (?43) continuously for
17-year
11
Hong Kong Property Price Bubble
Up from 85 to 170 (?100) from 93 to 97 (5-year),
then dropped to 60 (?99) in 2003 (6-year). Up
again to 123 (?105) to 2008 (5-year), and is now
dropping
12
The US Property Price Bubble
Up from 32 to 294 (?819) from 1970 to 2007
(37-year), then plummeted in 2007/2008
13
A unique cause of the Japan Land Price Bubble?
  • The Plaza Accord signed in Sep. 1985,
  • Yen to US exchange rate dropped continuously and
    substantially,

14
A unique cause of the Hong Kong Property Bubble?
  • Asian Financial Crisis (Currency) started in
    Thailand in July 1997,
  • but Hong Kong dollars is pegged to the US, no
    currency risk,
  • the bubble burst was said to be a contagious
    effect of the whole region

15
A unique cause of the US Property Bubble?
  • Subprime mortgages
  • High risk loans
  • Credit derivatives
  • Alphabet soup (CDO, CDS, MBS, TABX)
  • Credit Risk Transfer by Securitization
  • Deregulation of banking industry
  • Shadow Banking

16
Any Common Symptom?
17
Any Common Symptoms?
18
Any Common Symptoms?
19
Why Cut Interest Rate?
  • Curing bubbles
  • the year-2000-bug in 2000 (US),
  • the dotcom bubble in 2004, etc (US).
  • Currency board arrangement (HK)

20
Why Cut Interest Rate?2
  • cushion the effect of the strong currency
  • 1980 - 1989 (JAP)

21
Return v Real Interest Rate, Japan
22
Return v Real Interest Rate, Hong Kong
23
Return v Real Interest Rate, the US
24
Why havent learnt from past?
  • A drug addiction model.
  • A growth of the economy achieved by credit
    expansion works like drug addiction,
  • as it provides a pleasant reinforcer of further
    growth, and
  • an unpleasant symptom of recession associated
    with withdrawal.
  • Unfortunately, with repeated drug use results in
    addiction, and
  • which would intensify the magnitude and the
    duration of the unpleasant symptom.
  • In other words, with more successful preventions
    of recession by credit expansion, more
    substantial credit supply is necessary to keep
    the bubble booming, and the more torturous the
    results of a bubble implosion would be.

25
The End
  • For enquiries, please send email to
  • Dr Edward CY YIU
  • Department of Real Estate and Construction
  • The University of Hong Kong
  • ecyyiu_at_hku.hk
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