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Cases analysis on bubble economy

2021-10-29 来源: 51Due教员组 类别: Essay范文

各位留学生大家好!今天100Due教员组给大家分享的是一篇经济essay代写范文,主要内容是讲:经济泡沫是指交易价格与资产内在价值之间的差距,其持续的基础是人们相信资产价格将继续上涨,从而继续购买和持有资产并进一步推高价格。我将通过分析日本和美国的案例来说明泡沫经济,并研究泡沫的成因、发展和破裂、相关解决方案及其启示。

Economic bubble refers to the gap between the trading price and the intrinsic value of an asset, and sustains on the basis that people believe the asset price will continue to rise so that they continue to buy and hold the assets and further push the prices up. I will analyze the cases of Japan and the United States as illustration of the bubble economy, and study on the causes, development and burst of the bubbles, relevant solutions and their inspirations.

Japan’s bubble economy

From 1980s to 1990s, the Japanese Yen got appreciated and negatively impacted the exports. Thus the Japanese government focused on stimulating the domestic demand and implemented easing monetary policies accordingly. As result, the money supply and the amount of money increased sharply, flowing to the stock market and real estate market and pushing the prices of these two types of assets to high levels.

The trend of speculation emerged, and the asset price climbed higher and higher, which further strengthened people’s belief that the asset price would always rise. Simultaneously, banks granted huge amounts of loans to people for them to buy assets. Banks, as the key function of an economy, were not allowed to have many bad debts otherwise the risk of bankruptcy would increase. However, if the asset price dropped sharply one day, the borrowers would definitely default; in other words, when the banks granted loans for asset purchase, they assumed a portion of the risks associated with the target asset. To avoid the potential bankruptcy of the banks, the Japanese government decided to protect the asset price from dropping, which was another driver for the bubbles to further expand. The consequences were severe, and numerous citizens could not afford an apartment or the rent and had to move to remote areas; at the same time, the consequences made people believe that buying was earning more deeply, which fostered the asset appreciation the other way round.

When the asset price rose to such a high level that could not be backed by the real economy, the Japanese government amended the monetary policy from an easing one to a tight one, which directly made the asset price drop sharply and the bubbles burst. As a result, Japan’s economy slid into a long term recession from then on.

Even if the consequences of the government policies were not good, yet at least it prevented the bubbles from further expanding and causing more serious consequences. Some people criticized the Japanese government’s actions taken at that time, but the Japanese government might believe in the saying that “if the does is nasty then swallow it fast”, since the economic bubbles were really a tricky problem at that time. The measures the government implemented included a tight monetary policy via enhancing the discount rate, and restricting the financing activities related to real estate trading such as restricting loan granting for buying apartments.

From my perspective, what the Japanese government did at that time was not the most sensible choice. First of all, rather than let the bubbles burst abruptly, the government could have chosen to focus on assisting the development of real economy to back the virtual one. This way, a portion of the capital in the stock market and the real estate market could flow to the real economy which was able to cool down the stock market and the real estate market as a result. If the real economy was developed, then the gap between the trading price and the intrinsic value could probably be narrowed down, and the size of the bubbles could be maintained at a reasonable and controllable level. Moreover, in developing the real economy, the government could adjust the structure of the economy, such as shifting the economic focus to the tertiary industry and encouraging innovation and entrepreneurship. Secondly, the Japanese government could release relevant polices to regulate the land allocation, real estate development and property price, reform taxation on properties, and establish the affordable housing system. These measures could be useful in stabilizing the asset price and solving the residential issues as well.

The United States’ bubble economy

In the 1990s, the manufacturing industry in the United States slid into recession, and the market was eager for a new economic growth point, which turned out to be the Internet industry. Capital flowed to this sector which made the NASDAQ Composite Index rise from 1990 and reach the historical high in March 2000. From then on it started to slump and the Internet bubble burst. After that, capital turned to the real estate market pushing the price up.

Venture capitalists and private equity funds invested in those Internet companies at the early age to help them grow and take them to the stock market for listing where they could exit with a considerable return. The return depends on the valuation of the companies at IPO or the trading prices in the secondary market if the early investors continue to hold the shares for some time after IPO and sell when they feel the prices are high enough. That is to say, the early investors had great motives to brag the valuation of the shares and push the prices up in the secondary market. Normally the retail investors tend to buy when prices are rising and sell when pricing are dropping. So the bragging of the valuation triggered more buy-in orders and further push the prices up like moves in circles. That was basically how the Internet bubble expanded, and when it came to March 2000, the Internet bubble reached the edge of burst. The NASDAQ Composite Index slumped sharply by 80% from 2000 to 2002, forcing many Internet companies to shut down. At the same time, investors who bought in the shares at high levels suffered from huge losses. But the market had to move forward to look for new chances and this time the market targeted the real estate industry. The real estate prices continued to rise, and the banks granted housing loans to support the trading. Simultaneously, the Fannie Mae and the Freddie Mac provided guarantee for the housing loans. Moreover, the investment banks of the Wall Street securitized the mortgage loans and enhanced leverage’s acceptability to people. All these helped the speculation on real estate assets and made the prices greatly deviated from the intrinsic values, at least in some specific regions. In these regions, the real estate bubbles were huge and were to burst when the market found that there was no more room for further going up and investors decided to sell. As a result, the prices dropped, plenty of borrowers defaulted, bad debts emerged, and the securities backed by mortgage loans turned to be non-performing assets. An economic crisis surged in the United States and affected the whole globe.

After the crisis took place, the country slid into recession. The government of the United States focused on the economic recovery by implementing mainly three measures. First of all, the government implemented an easing monetary policy through low interest rate and quantitative easing. Secondly, the government increased the deficit spending and cut the taxation to stimulate the economic growth. Thirdly, the manufacturing sector was taken back into focus for development such as the vehicle industry. Apart from these, the government also strengthened the supervision of the financial market and enhanced the risk awareness. These measures increased liquidity, led the capital to flow from the virtual economy to the real one and strengthened the impact of the real sectors on the overall economy. So far the economic recovery of the United States is still in progress and it might take more time for the completion.

From my perspective, I think the government of the United States should pay attention to several points as below when implementing the policies. First of all, the government should be careful in the degree of easing. When maintaining liquidity, the government should avoid oversupply of money which could probably lead to inflation or even a new round of bubbles. It is terrible that inflation and stagnation exist at the same time. So the money supply and interest rate should be stabilized without large fluctuation. Secondly, the government should balance the development of the real economy and the virtual economy, as these two back up each other. Furthermore, when developing the manufacturing industry, the government could consider developing the service sector as well, which has a higher margin to attract capital.

After these two cases analysis, finally I come up with several conclusions. To begin with, bubbles are sometimes unavoidable in economic development, especially when the economy is overheated and people have to judge whether there is really a bubble or the climbing price is just a normal phenomenon in economic development. Secondly, the government has to be careful in implementing their monetary policies and fiscal policies; in other words, the government should not go to extremes, that is, hard landing is not the best choice if the intention is to prevent the bubbles from expanding. There should be some milder measures which will not make the bubbles burst abruptly and cause recession as a result. Lastly, the development of the real economy is always essential especially those high tech and green sectors related to the economic transformation and industry upgrade.

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