Posted on 02/25/2008 5:39:35 PM PST by palmer
A financial bubble is a market aberration manufactured by government, finance, and industry, a shared speculative hallucination and then a crash, followed by depression. Bubbles were once very rare—one every hundred years or so was enough to motivate politicians, bearing the post-bubble ire of their newly destitute citizenry, to enact legislation that would prevent subsequent occurrences...
Nowadays we barely pause between such bouts of insanity. The dot-com crash of the early 2000s should have been followed by decades of soul-searching; instead, even before the old bubble had fully deflated, a new mania began to take hold on the foundation of our long-standing American faith that the wide expansion of home ownership can produce social harmony and national economic well-being. Spurred by the actions of the Federal Reserve, financed by exotic credit derivatives and debt securitiztion, an already massive real estate sales-and-marketing program expanded to include the desperate issuance of mortgages to the poor and feckless, compounding their troubles and ours.
...
There are a number of plausible candidates for the next bubble, but only a few meet all the criteria. Health care must expand to meet the needs of the aging baby boomers, but there is as yet no enabling government legislation to make way for a health-care bubble; the same holds true of the pharmaceutical industry, which could hyperinflate only if the Food and Drug Administration was gutted of its power. A second technology boom—under the rubric “Web 2.0”—is based on improvements to existing technology rather than any new discovery. The capital-intensive biotechnology industry will not inflate, as it requires too much specialized intelligence.
There is one industry that fits the bill: alternative energy, ...
(Excerpt) Read more at harpers.org ...
That said, with all the negative connotations that he implies (excess equity is bad, etc), there is good that comes from this type of malinvestment. Unlike houses which are bloated and useless for growing the economy, the equity bubbles like the one he is proposing result in real economic growth and innovation. The alt energy bubble should be no different, although it's going to be difficult to avoid the minefield of carbon rationing. But I would also note that the malinvestment in highly inefficient energy projects and carbon trading schemes will also trickle down into really useful technological investments which with luck we will be a leader in.
the next bubble
Yep, lots of garbage in this article too (e.g. a very poor explanation of ABS). But this guy and his friends get to choose the next bubble with a lot of help from the politicians.
So is this thread.
You have to look at the causes of things.
There is simply too much capital floating around for the available investment opportunities.
Why is this? Modern technology has made advanced nations rich beyond belief. The civilized world has been transformed from an economy of scarcity to an economy of abundance. We are able to make more goods than we can use.
Other societies are not as fortunate, but they are coming along. What will happen when the process is complete?
The only “big crash” will be in the West. The effort will only slow Asia’s economy down a little. The dollar will fall even faster, and oil will continue to go up.
Sorry to disagree but the credit bubble economy creates input shortages. Many raw materials like copper have tripled creating the abundance you speak of in disposable consumer items. Retail inflation was still tame at 4%, but wholesale inflation was 6%. The end result of the credit bubble is recession or destruction of the currency (in our case some sort of devaluation and replacement).
Bubbles were once very rare—one every hundred years or so
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The economic boom and bust cycle—some may even call it the business cycle — has been present for hundreds of years and likely since the dawn of whenever people started doing business.
During the depression not everyone got broke.. some got out just before.. THEN bought up America for pennies on the dollar..
True, the business cycle is eternal and driven by emotion and imperfect information. However the credit cycle vastly overstimulates the business cycle. The fact that we have some 2 million or so “extra” houses is well beyond what an ordinary business cycle would produce.
When the US economy falls the whole world screams.
Why? Because Asian jobs will evaporate since folks in the US won’t be buying products made overseas, need call centers in India to answer product questions, travel abroad spending US Dollars or wanting their tax dollars sent to Countries that cry down with the USA.
JMHO
Depression won’t come for a while, first a new bubble, then perhaps another, and then hyperinflation, then perhaps depression, but those last two are unpredictable and very unlikely in the current political climate.
So, government tax policy caused the dot-com crash.
American demand only consumes a small part of China’s exports, and Chinese domestic consumer demand has risen. China will be building over a million kilometers of new roads soon and won’t likely slow its economy down much to suit plans of a few people here. ...not to mention India and others.
Good read. I think this was first posted about a month ago. Big hint is the 4.5% fed funds rate.
Still a good read. There is a lot to digest there, and a lot of it very true and very compelling. Who knows what the next bubble will be, but he addresses many good points.
Thanks for posting.
Did you ever read the novel “ State of Fear” by M Crichton.
This article is a prime example of the lib media’s non stop fear mongering to sell books , magazines, and TV time.
Bank runs and tent cities coming to a neighborhood near you.
I don’t buy his premise at all. Bubbles yes, but not this premise.
Funny you should metion...
I went shopping yesterday. As I went down the isles of Home Depot, everything was made in China. I mean EVERYTHING.
Later, I went to Bed, Bath & Beyond. Guess what. Same deal. I flipped over all kinds of goods and EVERYTHING was made in China. Stunning. It wasn’t just the obvious junk or cheap goods. I mean, $200 kitchen knife sets that were made 100% in China.
And Asia is going to continue without a hiccup while we go into recession? There is NO WAY Asia will not feel great pain if the US consumer stops consuming. NO WAY.
Decoupling is a myth that got disproved on black Monday when the FED smashed interest rates by 75bp.
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