Put this crisis into historical perspective

A very interesting article that compares the current situation in the US to the previous slumping economic eras and with Japan during its "lost decade" of the 90s. The writer may sound a little optimistic but the figures are all there. Sometimes, the best buying opportunities come about when market is very pessimistic. However, this is the period most of us shy away from the market while waiting for the markets to fall further. In life , nobody actually knows what lies ahead....

FT.com: Hillary Clinton is one of several prominent figures to warn that the US "might be drifting into a Japanese-like situation". But she and other alarmists are just as wrong as when similar false comparisons were popular during the dotcom bust in 2000. Most modern mature economies are surprisingly resilient even in the face of large financial shocks. Take 2000-03, when the loss of wealth from America's stock market crash added up to 90 per cent of US gross domestic product. That dwarfs the 60 per cent loss in the two years following the crash of 1929. Yet the recession of 2001 was the mildest of the postwar era. GDP fell slightly for just one quarter.

For a financial shock severely to damage a modern economy, that economy has to have deep-seated structural flaws, as Japan's did. Three factors distinguish its long malaise from the present US crisis: the source of the problem, the size of the problem and the response of policymakers. Japan's economic flaws were woven into the fabric of its economy. While international firms such as Sony and Toyota excelled, most of Japan's domestic economy was kept inefficient by regulations and anti-competitive practices designed to protect the weak. The authorities responded to a structural shortfall of consumer income and demand by using monetary steroids to feed investment in unneeded plant and equipment. These trends were reinforced by a dysfunctional banking system. The end result was a mountain of bad debt and "white elephant" fact­ories, stores and offices.

By contrast, America's subprime fiasco resulted from correctable policy mistakes. Regulators allowed non-banks to issue risky mortgages without having to heed the regulations applied to banks, such as requiring a down payment and proof of ability to repay the loan. The former Federal Reserve chairman Alan Greenspan refused to use the greater regulatory powers given him by Congress. Adding fuel to the fire, the tax code and stock option compensation system provide incentives to financial executives to take excessive risks with other people's money. Congress and the new Fed chairman, Ben Bernanke, are moving to correct the regulatory mistake

As for the magnitude of the crisis, there is no comparison. Most analysts believe the US housing crisis will cost about 3 per cent to 4 per cent of GDP. The higher figure equals the size of the savings and loan crisis of the early 1990s. Yet the 1990-91 recession was the ­second-mildest of the postwar era. In Japan's banking crisis, writedowns of non-performing loans amounted to a mammoth 20 per cent of GDP. In the 10 years before the 2006 peak, US house prices in the 20 biggest cities rose almost 200 per cent. In the 10 years prior to Japan's 1991 bust, commercial land prices in its six biggest cities rose almost 500 per cent. The bust not only erased all of that gain but also brought Japanese prices down to 25 per cent below 1981 levels. Most forecasters think US housing prices will drop a third from their peak, leaving them well above pre-boom levels.

While Japan's ills penetrated almost the entire economy, most of today's problem is focused on subprime adjustable-rate mortgages, which account for only 7 per cent of all mortgages. About 11 per cent of subprime ARMs are now in foreclosure, but among prime fixed-rate mortgages, which account for 65 per cent of all mortgages, the foreclosure rate is only 0.55 per cent.

Finally, US policymakers and financial institutions are responding far more quickly and aggressively than in Japan. Behind Japan's slow response was the fact that pervasive structural defects made many of the needed solutions painful. The US has much more room to manoeuvre. The government is applying fiscal stimulus, financial institutions are rapidly writing off bad assets while seeking new capital, Congress is working on mortgage relief and the Fed is acting aggressively to forestall a credit crunch. While interest rates have risen for risky assets and some narrow credit markets have occasionally seized up, ordinary bank loans for business and consumers are still expanding at a healthy clip.

No one should underestimate the damage done to the US by hands-off regulators and a harmful executive compensation system. Worse, today's housing crisis comes at a time when the US economy is under stress from high oil prices, low consumer savings and other problems. So even more action will be needed. But let us maintain perspective. Spreading panic is not the way to restore the economy.

* The above picture is not a juicy orange but a sun. It is comparing the size of sun with earth and other planets. Noticed how small is our beloved earth compared with the sun and how small and insignificant we are in this universe. Relax and learn to smile to everyone...yezz!