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Posted 5/9/2005
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Lessons from Japan's bubble -- for ours
A real-estate bust could cause problems throughout our financial system. Just ask Japan, where the economy is still struggling to get over a 1990 crash.
By Bill Fleckenstein
As regular readers know, I have spilled much ink about the housing ATM and the reckless behavior it has spawned. I thought that this week, it might be useful to delve into a related subject I've been thinking about but have not written about: the difference, thus far, between what Japan has experienced in the 15 years since its bubble popped in 1990 and our own post-equity-bubble experience.
New dawning of an old bubble
A key point I've been aware of -- but embarrassingly slow to really comprehend -- has been the fact that the big bubble in Japan occurred in the real-estate market. Lots of folks, including myself, have talked about the Nikkei at 40,000 and how absurd it was. It was absurd, but the Nikkei was only dragged higher because of the complete madness in real estate, which was far more absurd.
When Japanese real estate (and stocks) started to sink, it infected the country's financial system. Bad loans throughout the financial system, together with the collapse in real-estate values, fed on themselves. That combination helped to precipitate the environment that Japan has experienced, in which it has seen real-estate values decline for 14 years. It's been unable to extract itself from the consequences of its dual bubbles. It's my belief that Japan's experience of dual bubbles has been underemphasized.
Fed meddling feeds a mania
Here in America, we had a wild stock bubble. But when it burst, there were not a lot of bad debts and defaults to impair the financial system. Yes, we had a couple of sizable implosions like WorldCom and Enron, but they were more isolated events. However, in the real-estate mania that Fed Chairman Al Greenspan has fomented -- in an attempt to bail out his equity bubble -- he has succeeded in creating a Japanese syndrome, if you will, here in America, where we see the complete abdication of responsibility in real-estate lending standards.
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Wrought by a day of reckoning
As everyone is now aware, anyone capable of fogging a mirror can essentially get a 100%-financed home. Scores of people have more than one real-estate "investment." Powering this mania has been not just low rates but the ubiquity of financing and easy credit. This has been the major factor in driving prices to wild levels, and in allowing people to live beyond their means via the housing ATM.
Throughout, it has all seemed nearly magical. However, when our real-estate bubble bursts -- and it will burst, though we don't know when -- we will be left with a financial system riddled with bad loans, as well as consumers who've not only lost their housing ATM, but also owe more on their homes than they're worth. All of that will greatly exacerbate the next-time-down scenario. When we have to deal with the consequence of both those bubbles unwinding, we are more likely to endure a period like Japan has been experiencing or like we went through in the 1930s.
I think a lot of people have dropped their guards and no longer worry about how nasty the financial environment could get. Why? Simply because the fallout from the equity bubble has seemed so manageable. Folks no longer worry that we might be forced to contend with a Japanese-like experience because, so far, we haven't. But that doesn't mean we won't.
In fact, given our lack of savings and massive deficits, we could experience a recession much deeper, though probably shorter, than Japan's.
Bill Fleckenstein is president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily Market Rap column on his Fleckensteincapital.com site. His investment positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of MSN Money.
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