There were other reasons for high Japanese land prices. Punitive capital gains taxes—designed by the bureaucrats to encourage “long-termism”—taxed short-term property gains at 150 percent of profits. By discouraging the sale of land and creating an illiquid property market, the fiscal system actually stimulated land speculation.…
Between 1956 and 1986, land prices increased 5,000 percent, while consumer prices merely doubled. During this period, in only one year (1974) did land prices decline. Acting on the belief that land prices would never fall again, Japanese banks provided loans against the collateral of land rather than cash flows. Towards the end of the 1980s, they increased lending against property, especially to smaller companies. The rising value of land became the engine for the creation of credit in the whole economy. Tochi-hon’i sei, the land standard, had arrived.
Quote taken from page 293 of Devil Take the Hindmost: A History of Financial Speculation by Edward Chancellor, published 1999.
I’m sure readers of this blog will recognize the parallels between Japan’s experience and America’s own recent experiences. Rising land prices, government intervention helping create a future problem, and serious lapses in loan standards. This has all happened before and we have all suffered for it, so why did we think it would be different this time?
I continue to think that the financial industry (and the world) would be better served by more students of history rather than more students of math, business, or economics.
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