Recently, his name is seen in Japanese media as Japanese prime Minister Abe Shinto’s adviser. In the middle of June, Japan increased sales tax for the first time in 1 7 years. Abe has been seeking advice from Sheller about whether to increase sales tax during his economic revolution that has been entrenched for 2 years (known as the “Shrunken Mindset”). His performance and past record is highly admired in Japan and he will be exposed to Japan’s media more in the future. The two books I read made me notice many surprising and interesting facts about stock and real estate markets that I was unaware of.
I will conduct an in-depth analysis of each book and summarize causes and solutions of prime loans. Supreme loans were the focus of both books. Will also state my opinions and responses toward them. Irrational Exuberance (2nd Edition) from 2005 is written about an analysis of speculative bubbles in the real estate market and the acknowledgment of the coming collapse of the housing market, which was rising at the time. When he published the first edition of this book in 2000, he also predicted the burst of the IT bubble.
The title of this book was first used in a speech given by Alan Greenshank, the Federal Reserve Board Chairman at the American Enterprise Institute in the sass. Nowadays, it is used to describe the unreasonable behavior of the stock market; this phrase perfectly matches with the phenomenon observed in supreme loans. In this book, Sheller proposed 12 structural factors that contributed to the boost of the real estate bubble, which were also similar factors that caused the IT bubble to grow in the sass. The capitalist explosion and the ownership society At first, the capitalist explosion and the ownership society encouraged stock investing.
After the end of the Cold War, most other countries including China and Russia gradually turned into western capitalist societies which harbored he ideal that value of private property has a greater influence in their citizen’s lives. Along with this, economic competitiveness in free markets was becoming a guideline in the world. President George W. Bush named our new society the “Ownership Society” (Page 33). The aim of this name was to extend homeownership to more people and encourage people to invest in the stock market. Also, from the late sass to early 1 sass, corporations started to downsize and layoff staff.
This experience of being laid off told workers that jobs are no longer secured. This movement encouraged workers to take control of their lives that eventually led to purchasing speculative investments. As Sheller mentioned, this definitely encouraged people to invest in the stock market and contributed to the extension of homeownership. In fact, the increases in stock market values in the late 1 sass and the increases in home values in the early sass far exceeded the amount people that Were saving from their paychecks (page 35).
Through investing, believe people were so thrilled by their increase in asset values, since they came without labor or worry about being laid off. People simply bought and held stocks. Cultural and political changes favor business success Due to a significant rise in materialistic values, people view money as an important key to the success. In fact, positions that dealt with finance became more attractive than teachers or scientists. People’s perspective towards what is “success” changed in the mid ass and as a culture people began to favor success in business and investment more than ever.
After Ronald Reagan took over the White House, change in Congress was seen. Since Republican lawmakers are more pro-business, they enacted a variety of laws that boosted public confidence in the stock market such a huge tax interest cut. Japan recently launched NASA (Japanese Nippon Individual Savings Account), which offers tax exemptions on capital gains and dividend income from investors who are residents of Japan and are above 20 years of age. After this program was introduced, it did not bring a huge impact, but the number of people who were attracted and actually made investments increased.
This indicates that change in government policy favoring investing gives more incentives for people to get involved in the practice. New information technology When the cell phone was introduced in the early 1 sass it had a great impact n bull markets. People became more connected and information was instantly exchanged. In the mid 1 9905, the world-changing innovation, the internet, appeared and grew exponentially. The combination of cell phones and the internet allowed investors to exchange stocks smoothly and conveniently internationally.
The introduction of the internet enabled us to access lots of resources and finish tasks that could not have done before. Soon it became a source of entertainment and a preoccupation for all of us. There is no doubt that the birth of the internet, along with cellophanes, personal computers, and other gig technology devices and applications, contributed to the growth of corporations, profits, and the stock market. Supportive monetary policies and the Greenshank Put Greenshank was once a Federal Reserve banker of the U. S. , and through his career he saved and recovered America from multiple stock market crashes; one example; “Black Monday. The book says that during the boom years of the sass, Greenshank and his government were only watching the growth of the stock market and did not take any measures until the very end (Page 40). When the stock market boom began and prices were starting to shoot up, the Federal Open Market Committee (FOMCL) increased the interest rate. This created a huge impact in the financial world. The one effect that many economists thought was that Greenshank engineered a soft landing by raising the interest rate. However, due to this movement, the fears of increases in the stock market or inflation were taken away from people.
Therefore people became optimistic about investing in the stock market. Moreover, he was being supportive of the stock market which caused people to start thinking that he might manipulate momentary policies to prevent a drop in the stock market. He did in fact do this when he prevented the “YAK Crisis. ” After this, people were under the misapprehension that the economy would be always protected and maintained by Greenshank, and believed he would continue to take measures to protect the U. S. Economy, hence why his momentary policy was called the “Greenshank Put”.
His action of aggressive cuts on interest rates and risk cuts prevented a recession, but the market became buoyed and eventually brought real interest rates into negative territory. Certainly, his positive stance toward market and momentary policies implanted optimistic thinking about the stock arrest in people’s minds that eventually supported the bubble from behind. The perceived effects of the baby boomer generation The baby boom after World War II resulted in a large number Of people aged 35-55 in 2000, which were most likely the people who invested in the stock market during that time.
Society itself began putting value on investing and it eventually became the new trend. Concerning the first and second factors that Sheller presented, there is no doubt that people had an eagerness to be wealthy and be successful through investing. Although Sheller argues that here is no clear correlation between the rise of the stock market and the baby boom, we must continue to pay attention to the baby boomers since their actions tend to influence the economy. I personally think that when this generation retires and turns to cash, or release their real estate assets at the same time, it might affect the economy.
Although the baby boom and this housing bubble have no solid connection, the effect people in this demographic range have is huge, and their behavior and tendencies should be carefully analyzed. Since the population in this demographic range is quite rage, the number of people who invested in the stock market is greater than other generations. An expansion in media reporting of business news The sass’s surge into business media undoubtedly contributed to interest in the stock market.
In 1 999, a national Sunday magazine insert for a newspaper carried an article titled, “How to (Really) Get Rich in America,” which told success stories and scenarios of investors. All the calculations assumed that the S&P index fund earned a risk free 8% real return (Page 61), however, the article did not mention that there is a possibility that the return might be Geiger or lower than that, or that investors might end up losing money. There was also an article titled, “Everybody Ought to Be Rich” with similar content. These manipulative stories fascinated the general public and guided them towards investing.
This section was one of the most solid sections because it quoted several studies and examples from other people. The influence of mass media is strong regardless of business reporting. A number of studies were done to look at the impact of media on the stock market, which most likely affected investors who where less interested in the depth of understanding the arrest. Since the general public didn’t even understand the basic rule of inflation and the movement of stocks, these superficial business reports and promotions just gave a negative effect to stock markets.
I believe the media influence on business and stock market information to the public is one of the biggest issues that we will continue to face. Analysts’ optimistic forecasts The biggest failure is that analyses were based only on data from the past 10-30 years. TO fully draw a picture Of upcoming trends, analysts should have included long-term economic indicators as much as possible or even taken a kook at other countries’ trends and failures during housing bubbles such as Japan. Failure to include them caused forecasts to have optimistic prospects.
Surprisingly, stated in Irrational Exuberance, comparing the latest earnings announcement with the latest forecast did the casual evaluation of analyst’s forecasts. Therefore analysts could not accurately estimate earnings just before they were announced (Page 46). This is an unbelievable fact, but analyst’s estimates were routinely overoptimistic in the last sass’s. This unprofessional behavior led people to have optimistic views towards the tock market. The expansion of defined Contribution Pension Plan Defined-Contribution Pension Plans grew and replaced many Defined-Benefit Plans.
Labor unions and big manufacturing industries-?especially autos-?declined, and the creation of 401 (k) plans brought more options with peoples’ own investment choices on defined-benefit plans. These over-time changes in the pension plans encouraged people to learn more about it and stocks as one of their investments for retirement. Since 401(k) plans do not offer any real estate options, this encouraged the growth Of public interest in he stock market relevant to real estate.
The growth of mutual funds From 1982 to 1 998, the number of mutual funds expanded from 340 to 351 3, and by the 2000 peak in the stock market there were nearly accounts of equity mutual fund shareholder per family in 2000 (Page 49). People felt more comfortable giving their money to experts who managed mutual funds. Compared to investing on individual stock individually, mutual funds allow you to hold various kinds of stock from various fields. Additionally, experts who have more information about the movement of the stock market select all the stocks.
Mutual funds were also started to be used as part Of 401 (k) pension plans, which attracted risk avatars. Another reason why it proliferated so rapidly is because of huge advertisements all over the media. Flows of money to these mutual funds were seen a lot. The surge of mutual funds definitely gave more opportunities for people to invest without knowing the details of stocks they are holding. Decline of inflation created the illusion of wealth and prosperity According to Chiller’s interview studies, people believe that the inflation rate is a barometer of the economic and social heath of a nation (Page 50).
Since low inflation is viewed as a good sign of the economy there’s no surprise that a lower inflation rate brings confidence in public markets. The interesting point is that, according to economist Franco Modeling and Richard Cohn, the stock market reacts inappropriately to inflation because people do not fully understand the effect of inflation on interest rates (Page 50), and public misunderstandings regarding inflation encourages high expectations for real returns. This is a huge problem and, as it is written in the book, the media would not make corrections for inflation because it would be too complex for he general public to grasp.
Easier terms and board descriptions are more appreciated by the public. Overall, it is said to be true that a decline of inflation makes people more active in terms of economics. Regardless of peoples’ lesser knowledge of inflation, people surely make investments when the inflation rate is low. The explosion of trading volume Technological and organizational development changed participators’ methods to invest and access to the volatility of markets. Investing itself became easier and friendlier to the public due to a decline of the transaction cost.
People called amateur investors who “day trade” began to join the market, increasing stimulation. Moreover, the growth of online trading, as well as internet-based information and communication services, allowed people to have access to the stock market anytime, minute-by-minute from any location. Thus, more volatility was seen in prices whenever the market was open. The explosion of trading volume among discount brokers, day traders, and twenty-four hour trading kept the bid in the bubble. The rise of gambling opportunities There was an increase in gambling over the years.
I believe the rise of ambling institutions and increased frequency of gambling had an affect on American culture and changed people’s capacity of risk taking as Sheller mentioned. However, I personally think this factor is not as strong as the other 11 . First of all, although it is certain that gambling, speculating, and investing are all classified in one category, with investing you can manage risk with increased diversification. Gambling, on the other hand, doesn’t account for diversification and is based on chance. Knowledge and technique are more demanded of one who invests, or plays, in the stock market.
Having established a habitat of being engaged to gambling and willingness to take risks eventually shifted to a form of speculation in securities. Conversely, this result was not captured in other countries such as Europe, despite the fact that gambling is common in their society. In this respect, I think the growth of gambling could be a consequence of the stimulation-intense investing activities, but would be the weakest out of the other 12 arguments. To summarize In Greengage’s speech Of irrational exuberance, he said, “How do we know when irrational exuberance has unduly escalated asset values? Federal Reserve Government, 1 996) As Sheller mentioned in Irrational Exuberance, there are many reasons and factors that led to and created this irrational exuberance of the real estate bubble. They are all connected to one and another and had a self-fulfilling aspect to them that is difficult and complex to capture in predictive scientific explanations. However, it is clear that this bubble is not something that was created in a short term basis, but something that has been built retroactively 20 or 30 years ago.
What we can do now is look back at past failures, evaluate and analyze why they failed, and reverent another crisis similar to supreme loans. Solution for the future There are various opinions and books about solutions to supreme loans and many of them have already been proposed to the government. The Supreme Solution, by Sheller, is another book relevant to supreme loans written in August 2008, which was during the peak of the bubble. This book is known as next series of irrational exuberance and focused more on solutions to this crisis.
Although nowadays, the supreme solution isn’t discussed as much as it used to be, it is very important to review and understand what loud have been done and what kind of solutions are out there to prevent another real estate bubble. Short term: bailouts by government In the immediate short term, the government must deal with the problem as soon as possible, and its short-term intervention, also referred to as a bailout, is suggested. The problem with bailout is that it must be done promptly, correctly, and without any injustice or unfairness. Moreover, allocation of sufficient resources and setting of proper goals of policies are demanded.
A bailout that the U. S. Government issues through this supreme loan was redirected by people for caring more about saving banks and bankers than helping regular people. Although the bailout done by the government to save failing companies from this crisis was criticized by many people, some of the bailouts were necessary to protect the economy. Otherwise, it would destroy public confidence and possibly lead to systematic failure (Page 158). Sheller brought up an example of the Nikkei index in Japan, which is still selling at less than half its peak value, in 1989 after the huge stock market crash (Page 59).
Even Japan has yet to recover from the real estate bubble rash years ago, a dilemma that the public is largely unaware of. However Japanese investors lost confidence and became reluctant in investing their money due to this crash. In fact, even today investing in stocks are becoming less popular in Japan due to this event among public, which prompted the government to enforce a tax break to those who invest in order to encourage participation. Sheller compared the use of bailout to trying to solve a disease epidemic by lavishing emergency care on the sickest and those nearest to death (Page 83).
This expression is very true. When you see the scale of damage the supreme rises can give to members of our society and other economies in the world, the short term bailouts done by government were the best urgent medicine to cure the failing economy. Long-term: demonstrating finance In The Supreme Solution, Sheller clearly writes that the solution to long term supreme loans is “demonstrating finance. ” Sheller describes this as the extension of the application of sound financial principals to a large segment of society, and using all the modern technology efficiently to achieve a set of goals (page 1 15).
There are so many changes that need to be addressed for emigrating finance. As Sheller emphasized in the book, information technology is key to the supreme solution, and it depends on framing institutional reform for the future. Lack of information or not having complete comprehension of information can lead investors to make poor decisions regarding important financial matters. Problems of this bubble consisted of growth and complexity of characterization and residential-mortgage backed securities.
Its high interest rate attracted not only Americans but also people around the world who believed in the continuous rise in housing prices. Unfortunately, no one really understood the details or high risks of securities that they were holding besides the agencies. We could have avoided systematic errors made by mortgage buyers by disclosing more information regarding securities. Complex investment products such as characterization are extremely hard to understand for the general public, and even to people who hold economic degrees.
That is why promotion of new information infrastructures that are not underplayed and are freely available to public are necessary, ideally in the form of financial planning web sites and financial engines. These tools should be more accessible and reviewed by professionals, especially when major changes were made to clients’ portfolios. Low-income families related to supreme mortgages had no clue that there was an inherent risk in such mortgages. The first thing we could do to make these people aware of risky finance and inherent risks is to promote comprehensive financial advice to all citizens regardless of income.
Low income brackets Of people are limited in their access to unbiased sources Of information; it would be ideal if the government built an organization to supply free financial advice to these people. This idea may sound too idealistic, however, if the government decided to implement this service in our society, the economy would be more stable and equally understood. I believe educating the public is very important and the result can be seen promptly when many people take advantage of reputable sources.
The cost of implementing this will be a huge initial investment, so maybe the government could charge customers to make up for the deficit. Another thing that the government can do is to set up a financial product safety commission that will work similarly to the Consumer Product Safety Commission (COPS). As described residential-mortgage backed securities in the previous paragraph, people were trapped because they had no idea what was happening in the marketplace. The excuse for the ones actually accountable for the failures was that the public did not pay attention (as it should have).
It is too cruel for people who are in a lower income range to sense the change of the market and manage it based on the vague information they have. The primary mission of the Financial Product Safety Commission is to protect the financial consumer to serve as an Ombudsman ND advocate (Page 129). In the supreme crisis many borrowers accepted mortgage terms that were offered to them without thoroughly investigating them. It is most likely that these mortgages were the ones that were not checked by licensed experts and spread among the rising population of homeowners.
Obviously, the government needs to improve the mortgage lending process to protect innocent people and prevent another supreme loan collapse from happening. New regulations would make it difficult for unscrupulous lenders to sell toxic mortgages as well. For example, when people make a contract tit a mortgage lender, a trained legal professional should be required to assist people in understanding the contract and provide legal advice to confirm that there is a mutual understanding between both parties. This approach is very practical and effective and is actually practiced in Germany.
To make it more effective, the government can make mortgage lenders provide a civil law notary every time they make a contract with people who cannot afford leaver or other professionals. Besides improving disclosure of information and the process of leasing contracts, improvement of financial databases is needed for stable operation f the markets. I was very impressed by the idea of creating a large economic database with information about individuals and firms under a protocol that allows information to be accessible when making contracts.
If the government subsidizes this database, it would be very beneficial for people because they could have a more accurate understanding of their financial situation. Eventually, permitting them access to this real time information could allow financial counseling and advisory to become cheaper and more efficient. It can also be connected with web pages – like financial model engines that offer recommended and customized products based on the respective financial situation. This could provide so many different services that are geared toward user-friendliness.
The only threat of creating public database is the protection of personal information. A new system of economic units of measurement for inflation would change the landscape of supreme loans, if not the entire housing market. Sheller argues that confused thinking about inflation can be avoided by adopting an inflation indexed unit of account. People would be trained to use this as a tankard value for commerce, and encourage others to think in indexed terms instead of thinking in currency (Page 141).
Some positive aspects are that we don’t have to rely on unstable currency to be able to buy things in real value that reflect changes In everyday inflation. Also, when people get used to inflation indexed units of measurement they won’t have false impressions that housing prices are rising even when they are put in the same situation in the future. Although there are so many difficulties, such as defining a quantity correctly, updating accounting rules, and educating public, e can avoid mistakes we made during the housing bubble in the future.
An excessive number of government bailouts were applied during the period of 2007 – 2008 to stabilize the financial system. The financial industry reformed as a result of the capital instability. Not to surprise, the bailout bills exceeded any previous government bailout in the history of America. The biggest problem of the real estate bubble bailout was the moral hazard that came with bank bailouts. First of all, if a manufacturing company goes bankrupt, the government would not intervene no matter how big they are. However, the government will always bailout banks to prevent a collapse in confidence of economy.
Due to this strong relation of banking industries to economy and to stock market, they know they will be always saved thus they have don’t have an incentive to avoid risks. Ironically, government bailouts only saved banks and financial institutions that were spreading mortgages securities, not low income individuals who bought them.