Lessons From Japan's Asset Bubble Bust

Great post from Dr. Housing Bubble, attempting to predict what may be in store for the US economy by looking at Japan's experience with their housing bubble bust. First two graphs:

It is hard to believe that we have learned so little from previous asset bubbles. Many of our policymakers have turned a blind eye to the Great Depression, euphorically thinking that somehow all variables of risk had been eliminated from the system. It would be one thing to acknowledge our current predicament and at least try something different from the past to combat the current financial demons we are facing. Instead, we are using policy moves from the past that had little impact in resolving financial problems.

This is primarily occurring with massive focus on lending institutions and banks. The Federal Reserve with the leadership of Alan Greenspan and Ben Bernanke have focused tremendous energy on this sector while ignoring virtually all historical examples where this failed. Primarily, with the asset bubble of Japan that occurred from 1987 to 1990 and created nearly two lost decades of economic productivity. In today’s article we are going to exam [sic] a research paper published by the Bank for International Settlements that was presented in October of 2003 at the International Monetary Fund.

Reading the whole thing, it is remarkable how much our housing bubble mirrored the Japanese housing bubble, and that our policy-makers, who should have known what was going on, did nothing to prevent it, instead they happily fed the fire. The Japanese experience is pretty scary: in Tokyo, Japan's most bubbleiscious city, the decline in real estate prices from top of the bubble to pre-bubble levels took about eight years, with continued slight price decline and slight recovery over the following ten years. It is therefore hard to believe that we will see a housing price bottom by 2009 or 2010, as most pundits predict, or if we do, prices will should remain flat for a very long time. The US housing bubble is larger than the Japanese bubble, the entire world is in recession during (and as a result of) the real estate bust, and we have a huge debt, both individually and as a country (the Japanese are a country of savers), so the only conclusion is that our bust is going to be longer and deeper than the Japanese bust. Ouch!