Bubble Contagion: Mexico City to Tokyo to Bangkok to New York, London, and Reykjavik

Abstract

That four waves of surges in cross-border indebtedness and surges in prices of securities and of real estate have occurred in 30 years may set a record for global monetary instability. This succession of waves of banking crises might have been a coincidence; the alternative explanation is that one or several of these waves led to increases in cross-border investment inflows that led to increases in the prices of securities in other centers to levels that eventually became too high to be sustained. Obviously the first wave of surges in cross-border flows — which involved the rapid growth in loans from the major international banks to governments and government-owned firms in Mexico and ten other developing countries — was sui generis. Was there a connection between the banking crises in these countries and the surge in the supply of bank loans in Japan in the last half of the 1980s? Similarly was there a connection between the implosion of the prices of securities and real estate in Tokyo at the beginning of the 1990s and the surge in the external indebtedness in Thailand and its neighbors in Southeast Asia in the mid-1990s as well as in the external indebtedness of Mexico, Russia, Brazil, and Argentina? Was there a link between the Asian Financial Crisis that began in mid-1997 and the sharp increase in US stock prices in the next thirty months? And were the sharp increases in the prices of real estate in the United States, Britain, Ireland, Spain, and Iceland between 2002 and 2007 — and in the debt of the governments of Greece and Portugal and Spain in 2008 and 2009 — related to these earlier events?