I previously mentioned a worthwhile article, The next bubble, in Harpers. Well, the full article is now online.
Here’s the excerpt:
"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. 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.
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.
That the Internet and housing hyperinflations transpired within a period of ten years, each creating trillions of dollars in fake wealth, is, I believe, only the beginning. There will and must be many more such booms, for without them the economy of the United States can no longer function. The bubble cycle has replaced the business cycle."
Source:
The next bubble: Priming the markets for tomorrow’s big crash
Eric Janszen
Harpers, February 2008
http://www.harpers.org/archive/2008/02/0081908
You’re up rather early, my good man.
Waiting for the PPI with eager anticipation, no doubt.
No, just the miracle of “Post On” — I set this last night to post this morning
Seems to me like the decoupling theory has to do with typical working folk and those who have the power on wall-street to keep stoking the bubble fad of-the-day. And then you have guys like Krudlow, saying that globalization, cheaper prices are great! Yea they’re great until no one has any money to even pay for the cheap goods. I say the next bubble is going to be SOCIAL UNREST.
I’m in NO LA on business, but I had to share another nasty surprise for the bubble blowers:
Goldman, Lehman May Not Have Dodged Credit Crisis (Update1)
By Mark Pittman
Feb. 26 (Bloomberg) — Even Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. may find they haven’t dodged the credit crisis.
The new source of potential losses: so-called variable interest entities that allow financial firms to keep assets such as subprime-mortgage securities off their balance sheets. VIEs may contribute to another $88 billion in losses for banks roiled by the collapse of the housing market, according to bond research firm CreditSights Inc. Goldman, which hasn’t had any of the industry’s $163 billion in writedowns, said last month it may incur as much as $11.1 billion of losses from the instruments.
The potential for a fire-sale of the assets that would bring another round of charges has “always been our greatest fear,” said Gregory Peters, head of credit strategy at New York-based Morgan Stanley, the second-biggest securities firm behind Goldman in terms of market value.
VIEs, known as special purpose vehicles before Enron Corp.’s collapse in 2001, finance themselves by selling short-term debt backed by securities, some of which are insured against default.
Now that Ambac Financial Group Inc. and other guarantors have started to lose their AAA financial-strength ratings, Wall Street firms may be forced to return those assets to their books, recording the declining value as losses. MBIA Inc., the biggest insurer, said yesterday it plans to separate its municipal and asset-backed businesses, a move Peters said would likely result in a lower credit rating for the types of assets owned by VIEs.
EXCERPT
Barry
Thank you! I doubt I would have ever seen this article had you not brought it to BP. Janszen’s writtings ring true and answer a lot of my questions? So we have a choice a debt-deflation or a new bubble. Hmmmm
The new bubble, the farming industry, is already inflating.
Like all the other bubbles, imagine what happens when it pops.
Maybe the next bubble should be Survival Training, including classes on living within your means (perish the thought!).
Bubblelicious. Hot. Can’t miss. Outside farm investors showing their wares in Forbes. Inputs up 60-70%. Cash flowing by the truck loads. Crops up record highs and jumping up limits each day. Can’t buy a new tractor this year. Land being sought with all the passion of a gold miner.
We are in bubble land down on the farm, make no mistake about that. The SERICAL BUBBLE BLOWERS and the DEBTS DON’T MATTER crowds are in charge. God being in the middle of a bubble is so fun I could just XXXX.
Me I’m going to sell land and either buy junk bonds and retire to Florida all the while living off the juicy interest or I’ll buy gold and a Swiss Chalet. Can’t decide which.
YEA HA (shouted to the tunes from Dr. Strangelove).
The farm bubbbbbble is already so yesterday. The next bubble will be in alternative energy or nanotechnology
or maybe Iraqi real estate I hear the cash flow is great. Get on board before the crowds discovers it. That is the reality of investing in todays world.
Bubblelicious. Hot. Can’t miss. Outside farm investors showing their wares in Forbes. Inputs up 60-70%. Cash flowing by the truck loads. Crops up record highs and jumping up limits each day. Can’t buy a new tractor this year. Land being sought with all the passion of a gold miner.
We are in bubble land down on the farm, make no mistake about that. The SERICAL BUBBLE BLOWERS and the DEBTS DON’T MATTER crowds are in charge. God being in the middle of a bubble is so fun I could just XXXX.
Me I’m going to sell land and either buy junk bonds and retire to Florida all the while living off the juicy interest or I’ll buy gold and a Swiss Chalet. Can’t decide which.
YEA HA (shouted to the tunes from Dr. Strangelove).
The farm bubbbbbble is already so yesterday. The next bubble will be in alternative energy or nanotechnology
or maybe Iraqi real estate I hear the cash flow is great. Get on board before the crowds discovers it. That is the reality of investing in todays world.
“We barely pause at such bouts of insanity…”
So true. We lurch from one gold rush to the next, like itinerant prospectors, looking for that one nugget that will once and for all relieve us of the boring tedium of steadily producing value such that we sustainably grow.
The fed is a facilitator, but the enemy is us.
Until we quit w/ get rich quick schemes–be it stocks in internet companies that have barely any revenue, let alone profits, or houses and condos whose prices have no bearing whatsoever to the economic fundamentals of the localities in which they are situated and that nobody wants except as an investment–we will continually be digging for gold in a field of pyrite.
There is no free lunch. Accumulating real wealth requires real work and delayed gratification. And no economic entity, be it a nation, a family or a business, has ever got rich solely from borrowing money. It always take spending less value than is created.
Perhaps the pain of this episode of wild-eyed optimism will sober us up to the bigger truths of life. But, I’m not optimistic that we’ll even allow the pain that yields clarity. We’ve become too soft to endure any pain.
We’ll just print more worthless money and pretend everything is alright.
I don’t think it’s a leap of logic to tie the recent bubble developments to an increase in global liquidity. After all, that money has to find a home somewhere…
Oh, to be back in the halcyon days of yore, when the US NEVER had a bubble…back when the US actually made stuff and such, when there was NEVER a business cycle.
Oh wait, what does this guy call the panic of 1837? 1873? 1897? 1907? (I may be a year or two off on the year). Those were also classic boom&bust bubbles–canal building, railroads, etc etc.
I’d be more worried if this wasn’t something that has happened for, oh, 200 years, just in this country, never mind England and Industrial Age Europe.
The only interesting thing is that he’s calling for a 30% nominal drop in housing value over the next 5 years, but that’s not too far off several “mainstream” projections.
It appears the next bubble is one of pessimism and negativity.
I have to seriously agree with Justin. We are in the midst of drawing down the last of the bubbles. That being ag. And, just as housing popped, so will ag. In addition, I find it ironic that Greenspan has now stated oil is going up forever. He made similar statements about the economy in 2000. Oil too is a bubble. It’s simply a matter of when all of this pops. And, when it does, we shall see volatility not likely seen in our lifetime. That volatility will include social unrest. We already see signs of it in the U.S. with the opportunity for a populist to be elected President for the first time in eons. So, we already know social unrest is developing in the U.S. What happens when 1.3 billion people in China who were lured into spending their savings all while the communist government provided no social safety nets while encouraging such actions. The Chinese savings rate was so high because their society has no institutions to provide those safety nets unlike the developed world. Now, with their savings blown apart in a bust and no social safety nets…………It isn’t hard to figure out what will happen next.
This cycle will end very badly. And, that means massive destruction of capital. That will create a more harmonious supply/demand characteristic that will require the real economy re-emerge. Forget about the silly concept of never ending bubbles. Is this some new economic theory ready for the Nobel Prize?
“It appears the next bubble is one of pessimism and negativity.”
But of course, it’s the flip side of the wild-eyed optimism that this is a new economy without business cycles and that real estate never goes down.
Euphoria always ultimately yields panic. Rational, sustainable growth is the antidote to both, but to quote (hopefully correctly) Gordon Lightfoot, “…I think it’s a sin when you get feeling better when you’re losing again.”
“1837? 1873? 1897? 1907?”
They were all panics created by London Rothschild agents in the US to get control of our money, which they did in 1913. In 1907, JP Morgan, after his return from London spread a rumour one of the banks was going under, inspiring a bank run that spread wild, then came to the rescue by bringing in a ton of gold from London, and setting the stage for the Federal Reserve Act. This was written on Jekyll Island by the bankers themselves, and they took great care to conceal that fact at the time, and it was originally presented as the Aldrich Bill.
We never had inflation until the Fed was created. In the 19th century inflation was zero, except for the short period where we used greenbacks to fund the civil war, and greenbacks lost value in purchasing power because it was not a a monopoly currency and was not legal tender for all purchases.
But wars are already inflationary, and issuing the greenbacks made more sense than borrowing money from the bankers, which is what we do today.
Every depression or significant bubble has been created by the money makers, who at the end of the day, end up with more of the countries wealth, a transfer from the bottom 95% to the top 0.1%. If they lose a bit in the process, they kick and scream, and we cover their losses with a bail out.
We no longer have a significant productive economy, Volcker disappeared that when he squeezed inflation out of the economy, and what was left was a fictitous financial economy, where the money that is created out of thin air is used in elaborate games to create fictitous wealth that piles up on the gameboard. At the end of the game, the money makers pick up their winnings from the board, or if they lose, they force you to give them the money back (known as a bail out for those too big to fail/lose banks).
Our international participants sometimes want to walk away from the game with their money and not play anymore, preferring to use real money, but we have the petro play dollars for oil and food to keep them in the game, and if that does not work, we have a pretty big dude known as our military to make sure they play, or at least leave their money on the table if they walk away.