The Great Depression, 1929

The Great Depression was the longest and most severe depression in global economic history, lasting for virtually the entire period between 1929 and the outbreak of World War II. As a stark contrast to the roaring '20s, a period of prosperity and ostentatious wealth, the Depression created massive and virtually instantaneous poverty.  

The beginning of this period was marked by the Wall Street Crash, which remains the single most devastating crash in U.S. stock market history. On October 29, 1929, $10 billion (around $95 billion today) turned to dust. For some, it took entire lifetimes just to break even from the losses made at this point. 

In the years leading up to Black Tuesday, the Dow was turning countless men into millionaires. The market became a hobby for many ignorant investors, who readily poured all their money into the stocks of companies (many of which were fraudulent) that they didn’t understand. 

When the government raised interest rates, panic ensued. Investors were desperate to liquidate their stocks, but the money simply wasn’t there. Unfortunately, banks also invested in stocks, and the panic led to a run on those banks that reduced many to insolvency and failure. The country was thrust into the Great Depression, and much of the world followed.

The Great Recession, 2008

In 2008, the shock collapse of the Lehman Brothers Bank, which held assets worth $600 billion, became the symbolic start of the most dramatic financial crisis since the Great Depression. The causes have been attributed variously to the likes of a deregulated financial sector, poor public monetary policies and an international economy that was ultimately based upon a house of sand, with unsustainable levels of debt in both public and private sectors. 

Wherever the responsibility really lies, the effects are undeniable. Between the credit crunch, the stock market collapse and the ensuing recession, growth in recent years has been stunted, unemployment has remained high and governments have struggled to retain control over their own finances. It was estimated by one financier that by March 2009, up to 45% of global wealth had been destroyed. It could take years to reclaim it. 

Japan’s "Lost Decade," 1990-2000

The collapse of the Japanese asset bubble in 1991 led to a prolonged period of low growth, which has since been extended to incorporate the decade since the year 2000. The original lost decade was caused by an unsustainable level of speculation, large amounts of credit and low interest rates (sound familiar?). When the government stepped in to control this, credit became much harder to obtain, and capital investment dropped significantly. It led to a virtual halt in economic expansion during the 1990s, hence the lost decade. 

Japan was fortunate in avoiding a depression, but the effects of 1991 are still being felt, even today. It is a situation that some commentators feel could be repeated in Western economies in the near future if care is not taken.

The Japanese asset price bubble (1986-1990)

Japan’s domestic policies after World War II urged people to save money. People deposited more of their savings into banks, which made it easier for companies to take out loans and lines of credit. 

By using their lines of credit Japanese companies invested in capital resources, which made them capable of making more goods than international competitors.  Japan had provided high quality products on reasonable prices and its products high demands in world lead it to become a major economic power in world. 

The yen was appreciated and investors made good money off financial markets. Majority of people used easy credit to make property and homes making a speculative real estate bubble. Because of that the real estate prices gone skyward as 1 square foot rate of property in Tokyo was selling at $139,000. Stocks prices were having no limits in rising up, because of reinvestment the economy expanded more. In December 1989 the Nikkei reached all time high of 38,957.44. But in early 1990s Japan’s bubble started to sink. But that haven’t happened in flash of time that happened slowly, stock and real estate values decreased heading to Japan’s “lost decade”. People pulled out their investments and started investing out of Japan because of that Japanese companies lost some advantages of their competitiveness internationally. Low consumption rates coupled with lower output and employment meant steady deflation.

Though the government lower the interest rates to practically nothing that haven’t encourage Japanese people to put money in the banks. The government subsidized banks and businesses at extreme end of failure, supporting up the zombie organizations with little visible benefit to the economy. Finally in 2003 the Nikkei started to climb again. 

Lesson

Surely bubbles look wonderful while growing but when they sink, as they have to sink they pulls back the economy more than a decade.