Do you believe in bubbles?
The recent financial crisis has included some surprises. One surprise for me has been the realisation that amoungst even libertarians the idea of laizzez faire has a quite qualified following. After some contemplation it seems to me that the reason for this is that belief in what Alan Greenspan called “irrational exuberance” or what is sometimes refered to as an “economic bubble” is far more widespread that I thought. I don’t mean the soft form of irrational exuberance where we accept that some people some of the time do foolish things (including investors with money) or that given the same wrong information many people will make the same wrong decision but rather a belief in the notion that capitalism is prone to regular bouts of mass hysteria that knocks the whole economy out of kilter. It seems that this school of thought believes that free markets sometimes cause people on mass to do really stupid things and that at these times we need a mild dose of socialism to put things back on track.
Another name for this belief might be the “shit happens” view of markets. That prices are not set by meaningful processes in response to the real world but sometimes just by entirely random processes.
To counter this belief we would ideally list each crisis from history and work through the fundamentals that drove the event. We could consider the Great Depression, the stagflation of the 1970s, the stock market crash of 1987, the asian financial crisis of 1997, the tech wreck or the latest banking crisis. And we would find if we looked carefully in the right places that the root cause of each crisis was different. However I think we could also show that the root cause is not sustained mass hysteria or irrational exuberance or the notion of an economic bubble or some failing of capitalism per se. A notion that in my view is akin to an economist chucking their hands in the air and saying “I don’t know, blame it on the bubble”. As if the cure lies in either seeking out and destroying bubbles in the economy before they form or else in deflating them gentle when big ones are found. I don’t believe there is any basis for an anti-bubble ministry to improve on capitalism whether focused on prevention or on cure. The problem is not in capitalism or in markets but rather in government policy and regulation.
However given limited time and space I figured I’d simply make a start today and refer you all to an article about one of the more famous bubbles from history. The dutch tulip bubble of the 17th century. So here it is.
http://www.slate.com/id/2103985/
And if you have made it this far you might like to read the following article titled “Every Crisis is Just Like all the Others” by one of my favourite gold bugs, Nathan Lewis.
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Wikipedia also has a good article on tulip mania:-
http://en.wikipedia.org/wiki/Tulip_mania
Vern Smith (2002 Nobel in Economics) has a good “bubble” Op-Ed in WSJ’s 10/09 On-Line edition. Bottom line: The ‘bail-out’ of the burst bubble is so poorly structured that worse is to come.
Bubbles and crashes are typically caused by the economic goal posts being moved – and it is no surprise to learn who the main culprits are.
I believe in bubbles, but I believe that they will burst when still small unless fed with cheap credit.
A Duoist – I presume you mean this article:-
http://wsj.com/article/SB122351051370717359.html
What did you find good about it?
EAch of these crises is always like the others because they are all about fractional reserve.
But one big difference which will cause an even bigger crisis in the future is that the fractional reserve fraud has spread beyond CASH and is now a feature of everything that you can buy derivatives for.
This spreading of fractional reserve fraud is distorting our markets, will lead to great disasters, and is in no way a function of capitalism.
Graeme – but just remember you don’t actually oppose fractional reserve banking. It is the non-synchronised nature of bank loans and bank borrowing that bothers you. It is borrowing short term and lending long term that scares you to the bone. You are otherwise fine with fractional reserve banking (otherwise known as banking). I shouldn’t need to remind you of this all the time.
Fractional reserve is seeming a bit irrelevant to me recently. Isn’t the issue that banks should have to hold enough capital to pay all their depositors? It seems strange to me that there is such an investment as a bank deposit wherein the depositor has no guarantee that they’ll get their money back (unless the government provides one). Why can’t banks just be open about it and tell their customers the degree of risk attached to deposits?
They do. Ever read the terms and conditions when you open a bank account?
To paraphrase Mark Twain, “Believe in it? Why, I’ve seen it with my own eyes!”
I have not read this CIS paper yet but it seems to be barking up the same tree.
http://www.cis.org.au/policy_monographs/pm93.pdf
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