Describe the characteristics leading up to a market collapse - using ancient Rome and modern day Japan as examples

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ANCIENT ROME

As far back as 53 BCE we can find an example of boom and bust in Ancient Rome. It occurred in the area of Real Estate. Under the Roman Empire, only those who owned property were allowed to vote. Property-owners enjoyed other privileges as well. As a result, many citizens were tempted to borrow money in order to purchase property. Meanwhile, Julius Caesar and his government also needed to borrow money, to pay for their vast armies and wars of conquest. Money became scarce and interest rates consequently skyrocketed.

Eventually, overextended lenders became fearful and wanted their loans repaid. Many borrowers had to sell their homes in order to pay back their loans, and the result was a crash in the housing market as far more property became available than could find buyers. The basic story is probably not unfamiliar to you, since this sort of phenomenon has become common in modern Western economies.

JAPAN IN THE 1990S

A recent example of a boom and bust cycle is Japan in the 1990s. In the previous decade, the Japanese Central Bank had cut interest rates to try and stimulate more domestic spending, as they feared the rising value of the Japanese Yen compared to the US dollar would have a serious reduction in net export business and negatively impact the economy. The low cost of borrowing money did stimulate demand among Japanese consumers, many of whom went into significant debt to finance consumption of luxury items and invest in the stock market.

So much borrowed money going into the stock market drove its value way up. Domestic investors were convinced of their wealth by the paper value of their stocks and many decided to incur further debt, this time to put towards investments in real estate and housing. Two bubbles had thus emerged.

At some point, a number of individuals seeing just how high prices have risen decide to begin selling. Soon others in the herd begin to sense the emotional change in the market, and gradually fear become panic as everyone sells, sells, sells - leading to radical price drops and eventually a full-blown crash.