The Next Bubble: Priming the markets for tomorrow’s big crash

Harper's ^ | February 2008 | Eric Janszen

[grey_whiskers]

A financial bubble. I will use the familiar term “bubble” as a shorthand, but note that it confuses cause with effect. A better, if ungainly, descriptor would be “asset-price hyperinflation”—the huge spike in asset prices that results from a perverse self-reinforcing belief system, a fog that clouds the judgment of all but the most aware participants in the market. Asset hyperinflation starts at a certain stage of market development under just the right conditions. The bubble is the result of that financial madness, seen only when the fog rolls away. 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. After the dust settled from the 1720 crash of the South Sea Bubble, for instance, British Parliament passed the Bubble Act to forbid “raising or pretending to raise a transferable stock.” For a century this law did much to prevent the formation of new speculative swellings.

[grey_whiskers]

Go to the link. Long article, but worth it -- and relevant to oil and to the "green" movement.

Cheers!

[highpockets]

Did not read the article.

Bold statement or ignorant.

I choose BOLD.

We have the seen the beginning.

Up till now we have only seen those who should never have gotten loans, (47% last year alone), but we have not seen those who borrowed against their homes when the market was up.

I do not the know the true numbers but my guess is extremely high, those who took out seconds, thirds, and even fourths at the top.

What will be done with the excellent credit ratings who have negative equity now???????

We are at the beginning of this credit adjustment, and those who fall now will be those we once held up so high.

This will hurt everyone we have every known.

Love you Sis.

[kms61]

These successive Bubbles are doing a great deal to undermine the concept of an ownership society in the public’s mind. I hear a lot of comments from average joes likening the financial markets to a rigged gambling hall. And I can’t say that I disagree. These sharpies are going to look around one day and find that there aren’t any more suckers to fleece. I think that day is coming sooner rather than later.

[tcostell]

That's an excellent article and I agree with much of it, but I don't believe that alternative energy is set to produce an asset bubble.My reasons for that are technical and have to do with the decision making dynamics that are involved in an "information cascade" which is the behavioral finance term for an asset bubble. Basically I think there will always be enough cynicism in the alternative energy industry to prevent the stage from being properly set for a bubble.

I wrote a piece here which explains how the disclosure of some additional information could prevent all bubbles in the future by doing just that. It's something interested parties might want to read... even though it's a regulation change that's probably too technical for our "command & control" liberal congress.

- A Free Market Solution To Further Market Crises

Still ... that was a good article by a basically well informed and clear eyed person.

Thanks.

[grey_whiskers]

Bookmarked for later read -- I'm on vacation and it's 1:00 AM...

Cheers!

[garandgal]

I wrote this back in May on another thread; I'm not sure I agree with everything that I said...LOL...but it seemed interesting in light of this article.

"Far From Normal" Thursday, May 22, 2008 1:40:14 AM · 27 of 32 garandgal to meadsjn

I am by no means an economic expert (at all); but I have interests in both housing and agriculture...and a few other side things.

The biofuel, wind energy, and other such ventures are the new "computer revolution." I am not saying that they are nearly as significant; it simply appears that our "leaders" have belatedly realized that they have given away the store...literally allowing the transfer of untold amounts of intellectual wealth and technological development to the third world. It has left us with "nothing of value to sell" so to speak.

So, whether or not you agree with the green revolution, both parties will be fully on board, as I believe that they view it as the only way to save our economy.

Let's just hope that we are not so stupid as to allow our innovations to simply be handed over to the lowest bidder this time around.

My main changes to this would be to clarify that I am not saying that the "green revolution" is the way to go. Only that, those who make money by investing in the next great thing, believe that they can make it so. For example: Pickens ala yesterday.

[OKIEDOC]

But government control of the economy has proved to be a poor solution to market crisis in the past because it reacts too slowly, or costs too much. In the case of Roosevelt’s “New Deal”, the reference most often cited for past action, the policies approved by the government greatly extended the financial emergency of 20’s and 30’s and turned an economic crisis into an unprecedented economic catastrophe.

Comment:

In todays age of rapid socialization the above statement will be a hard sell to Democrats.

Enjoyed the article.

[leadhead]

I guess the ownership of oil futures is not public, but it would be interesting to know who is buying and, more importantly, who is selling. Commodity traders? Hedge Funds? Pension Fund managers?

Back when the Hunt family tried to corner the silver market, the public knew. But, I don't remember how the info got out.

I'll bet the "information cascade" is being staged by someone/ones that will soon get out of the market and leave the schlubs with worthless futures.

[ColdSteelTalon]

The gubberment will just print more and more money. That will be the solution. The only people that will really lose money are people on wall street. And that will only be for awhile. The gubberment will print even more money for them and saddle the tax payer with the debt through inflation.

Americans deserve the slavery they will be in.

[tcostell]

I know that’s not the way they teach it in the publi9c schools, but even Paul Krugman doesn’t dispute it.

[meadsjn]

You don't have to be a Meteorologist to determine that a tornado has scattered your house and barn across several neighboring counties, or to seek cover when the next one comes roaring across the prairie.

The author of this article seems to suggest we will fare better for the next bubble to occur unhindered than allow any corrective restraints. I'm not sure I buy that.

[Vet_6780]

The gubberment will just print more and more money

This is what Japan did to stem its deflationary decline for the past 20 years, but at least they had savings to do it with.

We don't have savings. We only have debts. Rising interest rates will stop any fiat 'printing' cold in its tracks.

[jsh3180]

“””guess the ownership of oil futures is not public, but it would be interesting to know who is buying and, more importantly, who is selling. Commodity traders? Hedge Funds? Pension Fund managers?”””
_____________________________________________________________

The dirty secret you are not being told is that government, The Federal Reserve and it’s member banks are pushing up the price of oil. The banks are near insolvency, loaded with worthless toxic paper “derivatives”. They take their worthless paper and turn it into the Fed as collateral for loans at the “begging window” that Bernanke et. al. have set up. They are using that money, obtained with worthless collateral to try and shore up their balance sheets. You will find that bank lending to business and consumers has severely dried up. So instead of lending,they are speculating. Long oil, short the broad markets, the consumer be damned, the top priority is saving the banking system.
In short, the Fed provides the worthless paper money, the banks push markets around to extreme profit for themselves and the numbnuts in Congress make alot of noise, but do nothing, as they know what is happening but they are all bought and paid for anyway.
The whole thing is beginning to spiral out of control, the soon to be “Mother of All Bailouts” is just around the corner, the government bailout of Freddie Mac and Fannie Mae is coming, it’s a matter of when, not if. I’d say before election time it shall be done, so the criminals in Congress can claim they are saving the system.
But........they will only prolong the inevitable..........greed and dishonesty have killed the Golden Goose. A country that was the richest and most powerful on earth 40 years ago is in it’s death throes. Hey, but we’ve got company.....the Euro countries are going under as well. Life as we have known it here in the USA is changing permanently............and not for the better I fear.

[ex-Texan]

*BUMP* !

[PogySailor]

bttt

[tcostell]

Well it depends on what you mean by “corrective restraints”. Very often with financial markets the government cure is far worse than the disease.

[central_va]

There are products that can help you. Please stay away from sharp objests.

[tcostell]

An information cascade can't be staged. It involves too many people. It's not like a traffic jam where a small problem can be multiplied. That's not how it works.

Really it's just a phrase to describe a phenomenon in group decision making. But it cannot be faked, or caused.

No one is cornering the oil market but lots and lots of people know where the money is coming from. All the guys who sell those products to institutions all talk to one another and they talk to their customers. No one is trying to hide where the money is coming from in aggregate but the specifics of any trade are certainly kept secret, as it should be. anyone in the institutional finance business can find out what's going on with a phone call.

And much of it is non traditional energy players who are buying "energy index" products from the large investment banks. That's what's caused the upswing in volatilty.

[tcostell]

I was awfully close to saying something too and then thought better of it. There's really no need to dignify comments like that with any sort of response... everyone sees what it is. (but I guess some times you can't help it)

Best. T

[Fred911]

save to read later

[Oratam]

Bump for later.

[mr_hammer]

“I hear a lot of comments from average joes likening the financial markets to a rigged gambling hall. And I can’t say that I disagree.”

Regretfully, count me in on being an “Average Joe”

[milky]

The problem with this is that uncontrolled, it could lead to hyperinflation and higher interest rates as a balancing consequence. Unfortunately with the current credit and mortgage crises, it’s just not something that is on the table...

It’s going to take a deft hand. This fire sale is bumming me out right now, though. I just hope that by the time this bubble ends, there will be enough America left owned by Americans to bother investing in.

[meadsjn]

Well it depends on what you mean by “corrective restraints”. Very often with financial markets the government cure is far worse than the disease.

In many cases, government regulation causes more harm than good. However, during/after the Robber Barron days, and during/after the previous Great Depression, there were some regulations put into effect that diminished particular types of destructive behaviors from the markets. For many years after WWII, we had prosperity and constructive growth in our markets. Sanity in the marketplace is not "class envy". I am all for the long-term survival of our nation and economy.

Just received this yesterday. The emphasis added is mine:

AN OPEN LETTER TO ALL AIRLINE CUSTOMERS From 12 Airline CEOs.

Hello {Mr. Airline Customer}, Our country is facing a possible sharp economic downturn because of skyrocketing oil and fuel prices, but by pulling together, we can all do something to help now.

For airlines, ultra-expensive fuel means thousands of lost jobs and severe reductions in air service to both large and small communities. To the broader economy, oil prices mean slower activity and widespread economic pain. This pain can be alleviated, and that is why we are taking the extraordinary step of writing this joint letter to our customers.

Since high oil prices are partly a response to normal market forces, the nation needs to focus on increased energy supplies and conservation. However, there is another side to this story because normal market forces are being dangerously amplified by poorly regulated market speculation.

Twenty years ago, 21 percent of oil contracts were purchased by speculators who trade oil on paper with no intention of ever taking delivery. Today, oil speculators purchase 66 percent of all oil futures contracts, and that reflects just the transactions that are known. Speculators buy up large amounts of oil and then sell it to each other again and again. A barrel of oil may trade 20-plus times before it is delivered and used; the price goes up with each trade and consumers pick up the final tab. Some market experts estimate that current prices reflect as much as $30 to $60 per barrel in unnecessary speculative costs.

Over seventy years ago, Congress established regulations to control excessive, largely unchecked market speculation and manipulation. However, over the past two decades, these regulatory limits have been weakened or removed. We believe that restoring and enforcing these limits, along with several other modest measures, will provide more disclosure, transparency and sound market oversight. Together, these reforms will help cool the over-heated oil market and permit the economy to prosper.

The nation needs to pull together to reform the oil markets and solve this growing problem.

We need your help. Get more information and contact Congress by visiting www.StopOilSpeculationNow.com.

[tcostell]

Ok... I get that it isn't your idea just something that you've been sent, but I have to say, I think it's one of the most irresponsible and potentially dangerous political ideas I've ever heard.

There's an old saying, that you can either run a company or run to Washington. The airlines have a long tradition of encouraging the government to restrict the behavior of others to their benefit.

Speculators (I mean pure speculators... not airlines ... which are also speculators) do not have an effect on the level of oil prices. They increase the volatility of oil prices, but not the level. I can't say it any more plainly than that.

You do not want Barney Frank and Chuck Schumer deciding who gets to buy oil and who doesn't. That's exactly what the Airlines want, and if you listen to this BS that's exactly what you'll get.

[henkster]

I know I’ll catch flak for this, but...

I actually don’t want the oil bubble to burst. I’d like to see prices drop, some, steadily, to around $100/barrel, and stabilize there. Am I nuts? Well, I don’t think so. If the price stabilizes, the economy will adjust. It’s the instability and resulting inability to make rational business decisions that’s bad.

I see $100/barrel oil as an OPPORTUNITY, not a curse. It’s an opportunity because it provides and incentive to build nuclear power for electrical generation. It makes oil shale extraction and synthetic petroleum from coal commercially feasible. Accomplish those things, and the mullahs can rake in the money from the Chinese and Indians. I don’t care. We’re taken care of and not bleeding money to them any more.

[OKIEDOC]

Most experienced oil men say oil should be around 50 to 70 a barrel.

Drill now.

[steelyourfaith]

 

Beam me to Planet Gore !

[Toddsterpatriot]

The gubberment will just print more and more money

This is what Japan did to stem its deflationary decline for the past 20 years, but at least they had savings to do it with.

No, Japan did not print more and more money. If they had, they would have ended their deflationary spiral. Instead, they spent trillions on government construction projects. They didn't stop the deflation and now their government debt is around 160% of GDP.