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Domestic Contagion: Twin Peaks?

In: Manias, Panics, and Crashes

Author

Listed:
  • Robert Z. Aliber

    (University of Chicago)

  • Charles P. Kindleberger

    (Massachusetts Institute of Technology)

  • Robert N. McCauley

    (Boston University
    University of Oxford)

Abstract

Within an economy, euphoria often spreads from one market to another. Property and stock markets stimulate each other in various ways. Higher wealth in one stimulates spending and faster growth, which raises the price of the other. Investors respond to a rise in the price of one by diversifying into the other. Higher property prices increase the value of the collateral that banks hold against loans, and banks increase the supply of credit. In 1980s Japan, banks held lots of shares, so the stock boom directly boosted the supply of bank credit, inflating the bubble spectacularly. Stock market and property may show ‘twin peaks’ on the way up, but on the way down stocks tend to fall faster than property. Speculators in real estate tend to borrow on extended terms and can hang on in hope.

Suggested Citation

  • Robert Z. Aliber & Charles P. Kindleberger & Robert N. McCauley, 2023. "Domestic Contagion: Twin Peaks?," Springer Books, in: Manias, Panics, and Crashes, edition 8, chapter 0, pages 173-186, Springer.
    • Handle: RePEc:spr:sprchp:978-3-031-16008-0_7
    DOI: 10.1007/978-3-031-16008-0_7
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