Been meaning to get to this for some time now —
Intro:
"The financial crisis has shown that markets are
bubble-prone and that laissez-faire regulation doesn’t work. The
authorities need to get a grip if we are to avoid a mega-bubble. But we
may need an even deeper crisis for that to happen"
Excellent read . . .
>
Source:
How to stop the next bubble
Mark Hannam
Issue 148, July 2008
http://www.prospect-magazine.co.uk/article_details.php?id=10254
How to stop the next bubble (PDF)
Perhaps George Soros has the best idea; summary execution for one’s screwups will more than offset the temptation toward willful misconduct in pursuit of performance bonuses.
It is an excellent read. More intelligent regulation–something relatively rare from a government–might have blunted the housing bubble. However the essence of both the dotcom & housing bubbles is the excessive creation of fresh money/credit by central banks. You cannot lend money that no one has ever saved without distorting the price system by which resources are allocated.
In the housing bubble foreign central banks contributed tremendously to the problem as they bought & still buy US long-term debt, thereby lowering mortgage rates substantially.
Indeed, this is the other shoe that is yet to drop: When foreign CBs finally must stop doing this because of their own domestic inflation, US long-term interest rates will rise painfully.
The issue missed in this article is how the lack of transparency contributes to the creation of bubbles. Once the veil of obfuscation is removed from all financial transactions, we can make some real progress in the prevention of bubbles.
That Anatole Kaletsky makes my blood boil! Annoying pollyanna ! To avoid the next bubble, we should start by ignoring Ayn Rand cheerleaders like him.
~~~
BR: Note the interview is from early July — he is already wrong.
The Fed and Fannie and Freddie were responsible for much of this mess. There is much blame to go around but with government entities involved very deeply here you cannot call this laissez-fare. No one knows what would have happened in a true laissez fare environment because we didn’t and don’t have one. The Fed distorts an otherwise true free market as does Fannie and Freddie.
~~~
BR: The Fed contributed to the current problems in two ways: They kept rates at 1% –way too low — for a year, starting a whole inflationary cycle that ended badly.
And, they were guilty of Nonfeasance in supervising/regulating banks. Left to their own devices, the banks imploded.
Barry, to suggest that we have a “laissez-faire” economy is ludicrous. We have massive government intervention and socialized losses of major banks. What exactly is free market about our economy??
Loose money and lack of smart regulation is exactly the reason we’re in this mess.
~~~
BR: That is not what is typically meant by “laissez-faire” — it usually refers to allowing the marketplace to govern behavior, not regulations or supervision.
The bailouts are a completely different set of policy disasters we will be discussing at length in coming months.
Barry, I genuinely believe that the economic and financial problems that we have seen and will see in the future are, at their core, caused by a complete lack of political leadership. Soros, and really anyone can babble on about the financial and fiscal policies that need to happen, but nothing will happen without a change in political reality and THAT WON’T HAPPEN until we are all standing on a bridge in New Orleans wondering where the buses are (if you get my drift).
As an example (often cited) we have a president who, after 9/11 basically told the American citizenry to “go shopping” and in fact the message was that if you were not active duty military, your patriotic duty was to go to the malls. If Bush was the coach, Greenspan was the guarterback and the play was called in and the housing bubble was inflated. Basically, the message was that the U.S. government exists to promote spending and borrowing and somehow that helps win a war I guess. And, BTW, can anybody guess what gets more media play these days: the housing bubble, or the war? I digress…
(BTW this is not a commentary on the conduct, right or wrong, of the war per se)
Fast forward now 7 years and the government is borrowing from our children’s future to send out “stimulus” which, again, it is our patriotic duty to spend at the malls. Does anybody think this makes the country stronger? Anybody? Can anybody think of a better use for $175 billion in BORROWED money?
Ok, so I guess the point is that it is GOVERNMENT POLICY TO CREATE BUBBLES and until that changes nothing changes. AND that won’t change until we get leaders that stop referring to and thinking of the American public as mindless “consumers.” AND, to be fair to politicians, that won’t change until somebody could actually get elected by telling the truth.
Oh, and who really cares about bubbles anyway when you have a federal government that is willing to socialize the excesses. It all just gets tacked on to the national debt and, seriously, who really cares about that?
And so, Barry, stop bringing this shit up because we want our damn bubbles, we need our damn bubbles and we can have our damn bubbles because deficits don’t matter and in the end the damn sun is going to explode and humanity will come to an end anyway, so why not go shopping with borrowed money!!
Yeah, I am rambling now but this stuff gets me a little upset. Oh wait, it is 10 a.m. here on the West Coast and you know what that means! The mall is open..see ya!
“No generation has a right to contract debts greater than can be paid off during the course of its own existence.” ~ George Washington
RIP America’s Debt-Based Monetary system
1980’s – 2007
Done in by the extreme greed of capitalist pigs feeding at the obscenely leveraged debt liquidity trough.
We are all now deeply subjected to the massive ponzi financial scheme needed to perpetuate the increasingly fake and bullshit US economy going.
km4, we definitely are subjected to this debt and ponzi finance in the form of socialized corporate debt.
World corporate leadership is so intertwined and tricky that many more bubbles could result. Money is what the co-ordiated power lovers say it’s worth. M4 anyone?
So we will be inflated and deflated on simultaneously. And bad medicine will be continually dispensed until everyone in the world is equally poor?
laissez-faire regulation? You have to be kidding Barry. If anything we have seen that government regulation hasn’t worked. Furthermore, it’s been the cause of the problems. The Fed, Fannie and Freddie, the government created rating cartel, implied backstops and outright bailouts from the government, government mandated accounting standard under SOX, etc, etc. The last thing those people need is more regulatory power. The authorities don’t need to “get a grip”, they need to go away.
I agree with Cheezebox: the US is not laissez-faire. The Fed’s ability to influence the money supply and its willingness to encourage moral hazard is a big part of the problem.
It’s too common for spectators to see something go wrong in the US and blame free markets. In the cases of finance and health care, two of the most heavily regulated industries in the US, it is the misguided regulation and public entities that create poor incentives for the private sector and cause the undesirable outcomes. But people tend to just chalk it up to “free markets” because that’s the United States’ reputation.
ditto to Brian
An example: if banks had to self insure instead of the Gum’nt implementing FDIC then the market will self regulate. Deposit your money in a bank with poor or bad insurance and risk it. Be a bank and do stupid stuff and insurance will get expensive. Markets work.
As it is, banks do stupid stuff, depositors don’t do their homework and the taxpayer gets the bill.
If the Gum’nt wants to help this system work they would provide information, not piles of ever decreasing in value paper money to whitewash over the things that curse the careless and uninformed.
Socialism does not work. It’s been proven empirically over and over.
~~~
BR: What is China these days? Capitalist Communists? Free market Socialists?
Try to be less doctrinaire — labels aint everything, and their are shades of grey between the black and white.
The truth be told it is the power of the financial elite that have caused this mess. End of story.
why does unfettered capitalism and free markets get the blame?
are fannie and freddie products of a free market?
are a bunch of guys sitting in a room playing with equations and taking best guesses at a centrally planned interest rate free market? a price control for credit? that’s free market?
you don’t need regluations for the free market, you need the regulations to handle all of this hidden socialism better if you want to keep it.
“”The financial crisis has shown that markets are bubble-prone and that laissez-faire regulation doesn’t work”
What a farce … this bubble was created by the governments.
“More intelligent regulation” .. this is like the communists circa 1985 who, when cornered with its obvious errors, always talked about “perfecting” communism.
Soros’ prescription is electing Barry Soteiro (aka Barack Hussein Obama) as a “solution.” Give me a break!
You nutters who want to remove all financial regulation should just go ahead. I figure I’ve got enough years left in my financial career that I could make some great money before the tsunami of stupidity that the complete lack of oversight would unleash brings the whole mess crashing to the ground.
If too much regulation caused this mess, what exactly caused the Great Depression?
Re “Socialism does not work…”
Of COURSE it works! If just DID work. Who do you think got away with all the loot? Your problem is the definition of “works” and “who benefits”.
The smart people (the insiders) will ALWAYS screw the dopes (the peasants). The “current ism” just defines the rules in place, at THAT time, that the smart people have to follow.
The US currently has a perfect mix of two “ism’s”; socialism and fascism. The smart people work within both “ism’s” to enrich themselves and their buddies.
Doesn’t matter if it’s Dick “The Dick” Cheney and Haliburton (fascism), or the Davis California City Council having the taxpayers pay for a new water system for their developer buddies (socialism). The Republican peasants love their fascist heroes, and the Democratic peasants love their socialist heroes (in the local Davis case).
The system IS working.
An example: if banks had to self insure instead of the Gum’nt implementing FDIC then the market will self regulate. Deposit your money in a bank with poor or bad insurance and risk it. Be a bank and do stupid stuff and insurance will get expensive. Markets work.
LOL. Either you are completely ignorant of banking history, or you are completely insane.
However the essence of both the dotcom & housing bubbles is the excessive creation of fresh money/credit by central banks. You cannot lend money that no one has ever saved without distorting the price system by which resources are allocated.
Posted by: algernon | Aug 24, 2008 12:30:51 PM
alg,
if only more People had an understanding of the basic fact that you posted(above)..
“too much regulation caused this mess, what exactly caused the Great Depression?”
Posted by: daveNYC | Aug 24, 2008 4:14:39 PM
dNYC,
if you read Bernanke, he says the FedRes did..but, what does he know? Right?
http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=Bernanke+Federal+Reserve+Great+Depression
end fractional reserve banking = no more bubbles
simple
You should not use Prospect as a source without understanding their agenda.
~~~
BR: I neither know nor care what their agenda is — but I saw an open discussion with some very interesting players — in particular, Martin Wolf, Anatole Kaletsky and George Soros — from all over the economic and political spectrum.
What exactly about that do you find nefarious?
(Forget the anti-spam captchas, its time to install IQ tests in order to post)
Why would anyone want to prevent the next bubble? In fact, if the next one dosn’t beigin to develop soon, were all scrooomed! But I’m not worried, with all the recent new legislation that’s been passed, I’m sure da boyz have figured out the loopholes and will begin to soon exploit.
How to stop the Next Bubble???
Ans. Get the cost of capital (interest rates) back to more historical levels and guess what asset classes (including real estate & equities) will also start to return to more normal levels!!!
Stop ignoring the white elephant (easy-money policy)!! You can’t put out a fire by pouring on more gasoline. Quit trying to get something for nothing. It isn’t working. It is actually making things a lot worse.
Bubbles occur when the investor class has to much money. I say we suck ‘em dry till they only have just enough money to keep the markets going; but not a dime to spare for speculative bubble investments. At that point it is not even going to matter if the Fed lets them levarage it up 10 or even 100 fold. Zero times a hundred is still just zero.
Could those who think Fannie and Freddie are the problem, tell me who would be keeping the rest of the housing market going if they where not here today. The private sector mortgage institutions blew themselves a huge bubble and exploded with it because there were no regulators to prevent them from doing that – and because the free market forces, as predicted, drove them to do exactly that in an unending hunt for better returns (we all know the short sighted and dangerous way those forces work when not kept on a very short leash: more fat profit, more fat bonus checks and bail out just before the company goes bankrupt, wash, repeat …..).
Gimme a break. We are overregulated as it is now. I interviewed Jim Rogers back in March and he said that some of the banks just need to fail—then we can start over from a sound base. Every time that we prop up something like Fannie or Freddie, we just end up making the problem worse.
You can hear our interview with Jim Rogers at http://www.stockshotz.blogspot.com
The creditors and stockholders of Fannie and Freddie just need to take their losses. We are moving toward socialism and IT WILL NOT WORK!!!!
JustinTheSkeptic is completely right. Everything else is noise.
Just the fact that we are reading this makes me think there is very little available cash to have another bubble anytime soon in ANY market…
The basic problem resides in the fact that a monopoly franchise has been granted to an international banking cartel to issue and distribute money vis a vis the fractional reserve banking system.
And this already inherently unstable monetary system is made all the more insidious by the ongoing attempts of the banking cartel’s government and central banks cronies to safeguard their interests vis a vis FDIC like schema and taxpayer financed bailouts.
However, such a system inherently results in overextended and overly levered financial institutions because its very continued existence is predicated on never ending leverage.
The initial leverage allows banking franchise members to capture the vig. But that is not enough to satisfy their insatiable appetite to steal the productivity from business and individuals. Leverage is piled on top of leverage until there is simply nothing left to steal from the host at which point the whole edifice collapses.
Then the core members of the franchise propose a brand new monetary and regulatory schema as a “solution”, thereby, allowing them to maintain their parasitic pole position in the next regeneration of the host.
Wash, rinse and repeat.
We’re going to stop the next bubble? Why in the world would we want to do that??? Heck, we’re on a roll.
Ok, I’ll read the article.
“… markets are bubble-prone …” — Mark Hannam
WAIT — stop right there! In a normal, sound-currency economy, markets are NOT bubble-prone.
Nearly all past Bubbles have been associated with paper-money inflation, financial innovation, and wartime credit creation.
The U.S. has all three, so “investment” (strictly speaking, impossible in a mixed-socialist fiat-currency economy) consists simply in identifying and riding the string of sequential Bubbles.
If this doesn’t sound like a recipe for national greatness — well, IT ISN’T!
Nearly all past Bubbles have been associated with paper-money inflation…
Really? Was the US money supply inflated during the 1920’s?
… financial innovation …
How do you propose to stop that?
Was the money supply inflated during the 1920’s? Uh…yes, through wildly expanded credit. Over the last few years, fixed income investors have had few alternatives. Securitizing mortgages and leveraged loans met some of that need for yield. Why were rates so low? Was that a market event or a central bank event? So much for ‘financial innovation’.