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The “Lehman Shock” Financial Disaster
the Effects on Japan
Introduction
In the third cycle, I researched about Greece’s financial crisis. In the research process, I
found out an attractive and interesting article, which showed the world economic
turndown, including the Euro currency problem, began from the “Lehman Shock”. I
heard the phrase, Lehman Shock, but didn’t understand what it is, why it happened or
what the influence on Japan was. Even now, that has not been solved yet. There are
also some fears that we face the unprecedented globe depression. We need to
understand this problem, and for the next several decades, we have to solve this
fundamentally and reshape the world economy by ourselves. So it is very important to
research this problem.
Review plan
As written above, in the third cycle, I researched about “Greece’s financial problem”
which was more difficult and technical. The third cycle was very meaningful for me.
But there some points to reflect or develop.
1) My report needs more examples and sometimes I need to explain problems with
actual statistics or numbers. Then my report will become more concrete and
understandable.
2) Not everyone has an interest in economic problem, so I need to make my report
more attractive. For example, I want to show how much the problem influences on
our lives.
3) There are many technical terms, so I’ll make paraphrases by using an
English-English dictionary and explain those by easy words.
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My starting questions
1) What is the Lehman Shock?
2) Why did it happen?
3) What was the influence of the Lehman Shock
In this report I will first explain you what the “Lehman Shock” is, why it happened and
what “subprime loan” is. That is the key to understanding this problem.
Background
In this part, I will explain what the “Lehman Shock” is. The Lehman shock refers to
failures of Lehman Brothers, the subsequent stock price crash, etc. used as the trigger
of the international monetary crisis. Before I tell you why it happened, I need to explain
what sub-prime lending is. I think you may have heard it on TV news and in the mass
media. Sub-prime lending is making loans to people who may have some difficulties in
their repayment schedules. These loans are characterized by higher interest rate and less
helpful terms in order to compensate for their higher credit risks. People borrow money
from banks to buy houses. These loans for buying property are called ‘mortgages’ (the
money that you borrow from a bank to buy a property). When the bank gives you a
loan it also gives you a ‘credit rating’. A credit rating is a judgment made by a bank
about how safe it is to lend money to you. Sub-prime loans are loans lent by people,
whose credit ratings are not good. When you return money to a bank, you also must
pay “interest rate”. An interest rate is how much extra money you must pay when you
pay back. As written above, people borrowing sub-prime loans are given low interest
rating, so they have more risks that they can’t pay back. In order to compensate for low
interest rating, they must take higher interest rate, in other words, they must pay more
extra money when they pay back.
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Next I explain the “sub-prime crisis” ,which was a main factor of Lehman Brothers’
bankruptcy. Many lenders were more positive in accepting sub-prime loans during the
boom from 2004 to 2006 (Investopedia 30th November 2011). They initially lend
money in lower interest rate, but through these higher risk loans, lenders sought
additional profits and, in order to compensate for the additional risk, they raised interest
rates. This is one factor in the sharp increase in the number of sub-prime mortgage
foreclosure. Foreclosure means bank or mortgage lender taking control of a person’s
property because they cannot pay back money that they borrowed to buy it. When
foreclosure happens, a person loses their house and possessions and they must move
out their home Owing to the increase of foreclosures, consequently, many lenders
(including Lehman) experienced financial difficulties and even bankruptcy.
Lehman was the fourth biggest investment bank in USA. It borrowed large amounts of
money to fund its investing, which led to its bankruptcy in 2008. A big part of this
investing was mortgage market. Lehman brothers could generate tremendous profits
during the boom of mortgage market and prosperous time. However as I said above, the
sub-prime crisis occurred. Investment banks such as Lehman were not ready for these
changes. In 2008, Lehman faced an unexpected loss due to the happening sub-prime
mortgage crisis. Lehman’s loss was a result of holding too much of sub-prime and other
low rated bonds. The loss resulted in more than 8billion dollars (BBC 16th September
2008). The value of its stock decreased 73 percent. Lehman lost their confidences of
stockholders and investors. Finally Lehman Brothers collapsed on 15th September
2008.
Effects on Japan
After the Lehman shock, not only the USA but also Japan and Europe suffered from
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big impacts. Even now the Japanese economy isn’t good. I researched how bad the
condition of Japan was after the shock. After the shock, many individual countries went
into recession and world economy has become worse and worse. Japanese industries
were heavily damaged by the Shock. Japanese economy depends on exports, mainly to
the USA.
Many Americans could not afford to buy Japanese products, for example,
automobiles and TVs. Moreover the confidence of US dollar was lost. this means
Japanese yen became stronger. This also disturbed Japanese exports. Next I consider
similarities and differences between USA and how Japanese society change after the
Shock. In the USA a lot of employers have dropped health coverage of insurance for
employees, and their costs for private health programs are beyond the budget of many
workers. Meanwhile in Japan, nation’s universal health coverage is more wide-spread
than that of the USA. But, there are some similarities between Japan and the USA. The
US poverty rate is 15.1%, and Japan’s is more than 16%. And the percentage of people
holding non regular jobs is at its highest level ever -38.7% (Japan times 4th December
2011). Moreover, in Japan, wages drop significantly between 2007~10, according to
surveys by “Keidanren”. For example, the average of annual salary of men in their 50s
decreased ¥5.58million in 2007 to 4.81 million in 2010 (Japan time 4th December 2011).
Meanwhile, the number of individuals belonging to the wealthy segment has continued
to climb steadily since 2001. So Japan is becoming a society with a widening income
gap and low wage society.
The Lehman shock is a very difficult problem. It occurred in USA, but its impact has
spread all over the world. If some countries will overcome this situation, it not may be
a fundamental solution. We have not come up with a fundamental solution yet. This is
the challenge for us. We must study and analyze this problem and rebuild world
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economic mechanisms.
In the fourth cycle, I had many troubles in picking out articles about Lehman Shock
from a lot of web-sites.
Almost all of these articles were very difficult discourses or
theories for business people. So these articles were really difficult for a an
undergraduate like me to understand, but, I read some articles about same theme in
order to catch contents and, since my teacher, Andy told me other some articles, so
somewhat I could carry out my research. I want to learn more technical knowledge and
develop my English skill, and I hope to be able to read those articles in the future.
Finally from my research, these issues are important to research further in order to
understand the effects of the Lehman Shock in more depth:
1) What should Japan do to rebuild its economy?
2) In what ways will the US economy recover from the “Lehman Shock”?
3) What the “sound economic condition” can we create in the current economic
system?
References
Bankruptcy of Lehman Brothers, Wikipedia, 26th November 2011. 30th November
2011 http://en.wikipedia.org/wiki/Bankruptcy_of_Lehman_Brothers
Occupy Wall Street resonates within Japan, the Japan times, December 4th 2011. 10th
December 2011 http://www.japantimes.co.jp/text/fd20111204bj.html
Subprime Lending, Wikipedia, November 8th 2011. 30th November 2011
http://en.wikipedia.org/wiki/Subprime_lending
Q and A Lehman Brothers bank collapse, BBC, 16th September 2008. 30th November
2011 http://news.bbc.co.uk/2/hi/7615974.stm
What is a subprime mortgage? ,Investopedia, 30th
November 2011
http://www.investopedia.com/ask/answers/07/subprime-mortgage.asp#axzz1h8X7Y
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