Friday, April 03, 2009

"A Few More Months Of Life"

One of the oldest puzzles of politics is who is to regulate the regulators. But an equally baffling problem, which has never received the attention it deserves, is who is to make wise those who are required to have wisdom.

Some of those in positions of authority wanted the boom to continue. They were making money out of it, and they may have had an intimation of the personal disaster which awaited them when the boom came to an end. But there were also some who saw, however dimly, that a wild speculation was in progress and that something should be done. For these people, however, every proposal to act raised the same intractable problem. The consequences of successful action seemed almost as terrible as the consequences of inaction, and they could be more horrible for those who took the action.

A bubble can easily be punctured. But to incise it with a needle so that it subsides gradually is a task of no small delicacy. Among those who sensed what was happening in early 1929, there was some hope but no confidence that the boom could be made to subside. The real choice was between an immediate and deliberately engineered collapse and a more serious disaster later on. Someone would certainly be blamed for the ultimate collapse when it came. There was no question whatever as to who would be blamed should the boom be deliberately deflated. (For nearly a decade the Federal Reserve authorities had been denying their responsibility for the deflation of 1920-21.) The eventual disaster also had the inestimable advantage of allowing a few more days, weeks, or months of life. One may doubt if at any time in early 1929 the problem was ever framed in terms of quite such stark alternatives. But however disguised or evaded, these were the choices which haunted every serious conference on what to do about the market.

John Kenneth Galbraith, The Great Crash


Anonymous Anonymous said...

Greenspan's choice, if he recognized the bubble in the first place.

4/03/2009 12:44 PM  
Anonymous Hairhead said...

In other words, who gets to be the adult, here.

Honestly, we are governed like children, by children.

4/03/2009 1:12 PM  
Anonymous KAIMU said...


Once again CHIMP ECONOMICS wins out!

Eat a banana, arms flailing with loud cackles, twirl in a chair and throw the dart! AHH-H-H!!!

The probabilities of actually hitting the "dart board of decisions" are slim and therefore CHIMP ECONOMICS has a greater success rate than Keynesian Economics!

What did Churchill say of Lord Keynes?

"If you put two economists in a room, you get two opinions, unless
one of them is Lord Keynes, in which case you get three opinions."

With a CHIMP you get none!

Just how scientific are "opinions"?

I vote for the CHIMP! All the CHIMP wants is a banana not a bubble!

4/03/2009 6:16 PM  
Blogger Spider said...

TCR, I have a question, and could you please comment here with the answer. Are you intimating or implying with this excerpt from The Great Crash that this bubble bursting/crash has already happened (the drop of the Dow from it's ridiculous height to below 8000 or wherever it is today) or are you saying that there is more crash to come?

You know, sort of like the quote from Babylon 5: "No Boom Today. Boom tomorrow. Always boom tomorrow!"

4/03/2009 11:11 PM  
Anonymous Anonymous said...

A must watch

4/04/2009 10:01 AM  
Anonymous KAIMU said...




Who's that in the MIDDLE?

Like the MAFIA skimming profits from VEGAS CASINOS ...


4/04/2009 2:48 PM  
Anonymous Anonymous said...

Please, CR, italics are NOT for more than a few words at at time. Indent, put quotes around it, but don't make us struggle thru paragraphs of italicized type. It ain't user friendly.

4/04/2009 11:50 PM  
Blogger TheEvilOne said...

"A bubble can easily be punctured. But to incise it with a needle so that it subsides gradually is a task of no small delicacy."

I suspect that puncturing an asset inflation bubble so that it subsides gradually can only be done early in the bubble's life. After a certain period of growth an asset inflation bubble will be being fed to a significant extent by speculators who are holding property with borrowed money which they cannot repay without liquidating their assets held and for which they can only pay the interest for a limited time. Such people are in trouble as soon as the bubble stops growing or even if its rate of growth becomes too low for them to refinance with a larger loan to cover already accrued and unpayable interest on their existing loans. This means that as soon as the bubble stops growing the proportion of speculators who must sell in distress causes an asset price collapse. Also in trouble are the lenders who have financed the speculation as they have lost much of the money lent.

When a bubble reaches such a mature stage things can only go two ways. Catastrophic collapse can be triggered by a sufficient mass of participants recognizing that the game will soon be up and trying to cash out or by lenders running out of lendable money or coming to the same realization of time being up and ceasing to lend. Alternatively there may be those who also recognize the inevitable end but are capable of marshalling enough of other peoples's money to keep the music playing for a mew months. I think this is basically a restatement of Keynes point that The Cunning Realist is quoting.

The mathematics behind an asset inflation bubble are the same as underly any Ponzi scheme or behind the collapse of any overly leveraged business. Consider the collapse of the UK tycoon Robert Maxwell's Newspaper group. This was in trouble well before the (November 1991) death of Maxwell when he fell off his yacht and drowned in The Mediterranean but Maxwell had managed to hide the problem until he had stolen all the money from his company's employee pension scheme. He behaved like any gambler facing a losing streak, doubling his bets with borrowed/stolen money. Consider also the collapse of "entrepreneur " Allan Bond's Bond Corporation in Australia in the late eighties. The year before the collapse Bond Corporation had reported its greatest profit ever, but subsequent analysis showed that it was entirely phoney, with assets being sold without cash changing hands to legal entities that could not afford to buy them.

Now look at the US sub-prime crisis. I believe that a careful historical examination would show that the asset inflation involving domestic houses had already reached the stage of catastrophic instability before the lending to poor people who could not pay started. This sub-prime lending was in part caused by insiders trying to prolong the boom a few months more while they themselves cashed out. I think that a proper inquiry would find a few winners who did correctly anticipate the end of the music and the rush to the chairs.

My point is that the problem was not the bursting of the housing bubble which occurred in 2008, but the failure to burst the bubble in all asset classes many, perhaps very many years earlier before the amount of stolen money became excessive. I am not an economist so my guess that the asset inflation in all assets not just housing had reached unsustainability in the mid nineties.

The fact is that for Governments bubbles are not all bad, they create a feeling of optimism and prosperity which makes their management of things look good even while it makes future catastophe certain. The motives pushing governments and regulators to delay action at the cost of making things worse to purchase a few months of apparent calm are overwhelming. I think you will find that the regulators of the Obama administration are trying to reinflate the bubble long enough to allow selected insiders to recoup some if not all of their losses.

4/05/2009 5:56 AM  
Blogger TheEvilOne said...

In my previous comment I left a sentence without a verb. The sentence should have read "I am not an economist so my guess that the asset inflation in all assets not just housing had reached unsustainability in the mid nineties can be taken for what it is worth"

4/05/2009 6:02 AM  
Blogger TheEvilOne said...

Actually I think asset inflation bubbles have been a necessary thing for all US governments for quite some time. Since Reagan there has been a massive transfer of purchasing power from the non-rich in the US to the extremely rich hecta-millionaires and above. In the normal course of things this would have resulted in a drop in demand and recession but allowing the non-rich to participate in asset inflation bubbles first in shares and then in housing created the illusion of prosperity and caused them to keep the economy ticking over by spending borrowed money that they could not afford.

The US economy has been a Ponzi scheme for quite some time.

4/05/2009 6:28 AM  
Anonymous Goldhorder said...

yes evilone. It has been necessary since 1972. And it will be necessary for the forseeable future.

4/05/2009 11:49 PM  
Anonymous am4 said...

I second Spider's question.

4/06/2009 9:46 PM  
Blogger TheEvilOne said...

Hey Cunning Realist. The last comment that I posted on this thread seems to have fallen in to a black hole. Is it waiting for moderation or has blogger lost it. It is the one about the real victims of the sub-prime rip off.

The reason I ask is that omitted taking a copy of it before posting on the assumption that I could do so later. If it has failed moderation could you email me a copy as I want to rework it for posting on other sites.

Regards, TheEvilOne

4/07/2009 1:22 AM  
Anonymous Anonymous said...

For a non-economist, EvilOne seems to have a highly intuitive feel for the ground level economics of the game.

High finance needs to face its moment of accountability.

4/07/2009 3:16 AM  
Blogger TheEvilOne said...

It is easy to become confused by the sub-prime crisis because several different issues which need to be kept separate are entangled therein.

First who are the victims? They were not the poor recipients of mortgages that they could not pay to buy property that they could not afford but the buyers of the supposedly AAA bonds based on these mortgages. The poor recipients of subprime loans started with no equity in the properties that they bought and lost nothing on foreclosure since the loans were secured only by the property with no requirement that the borrower make good any shortfall when the foreclosed property failed to sell for enough to match the loan. These borrowers were used as dummies in a fraud by the banks against the bond holders. The only effect of the abusive terms of the loans was to make the bonds look extremely profitable. Of course borrowers whose finances made them eligible for prime loans can also be considered victims when pushed into subprime instead.

The main effect of subprime was to prolong the housing boom for some time after it had exhausted the pool of people with money and credit worthy borrowers.

Who were the winners? Firstly there are the sellers of overpriced real estate, secondly there is a quote I remember that goes something like this "When the bell hops start buying it is time to quit the market". I suspect that there were some savvy people who recognized the spike in subprime lending as a signal that the music was about to stop, and grabbed their cash and ran for the chairs.

Who are the villains? There are the mortgage brokers who forged paper work saying that borrowers were credit worthy when they obviously were not, then the banks who failed to verify this paperwork and most of all the credit rating agencies that classified the bonds as AAA instead of ZZZ-. Some people will say the poor people who took out the loans were also culpable but I suspect most were naive and influenced by the brokers.

4/07/2009 11:08 AM  

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