| "Bubble" = Ponzi Scheme
I'm pretty convinced now that this is what all "bubbles" boil down to. Legalized economic fleecing. Bubbles entail rapid growth in some sector of the economy that is not actually backed in any meaningful sense by genuine wealth creation. I remembered a documentary-news item I saw many years ago, about a wanna-be Donald Trump like figure. He started out by getting a loan for $500, which he paid back. Then for $1000. Pretty soon he had a good credit rating. So he started obtaining loans to pay back the other loans and escalating himself up this way. After he had hit the seven figure range, he just started living it up on the borrowed cash, using his ever better credit to keep up with the various loans. The story ends fairly predictably in bankruptcy because he never did anything to make enough money to pay off whatever loan amount he would finally be stuck with when no one would loan to him anymore. From my vague recollection of the story, I don't think he much cared, he was just enjoying the ride. A one-man bubble.
This is what the various bubbles have essentially been about all along. They are at heart, wilful efforts to create artificial wealth using means that have certain eventual doom, and yet are backed vocally each time by a set of so-called financial gurus who claim they are bottomless. I don't really know if the gurus believe it and are self-deluded magic-market morons, or are con-artists who figure they can get out before their scams collapse. It doesn't really matter which they are. But they hurt a lot of people in process. Some of those are just as gullible or greedy, but the problem with these sorts of things is that they gain an inevitable patina of respectability because of the snowballing size and institutional muscle that gets behind them once they get going. The initial sceptics often find themselves overwhelmed psychologically because they see so many people making so much money, and start to doubt their own position. It's very human. We tend to think of people as either "gullible" or not, but in truth gullibility is a continuum. Most everyone is smart enough to avoid a street huckster's 3-card Monte scam, but few have the self-possession to refute their highly trained financial consultant's jargon laden advice on investments if delivered with the right forcefulness and certitude.
We've seen this now over and over. Enron was nothing but a giant confidence game played by Ken Lay and his top lieutenants. Each outrageous promise was eclipsed by the next fantastical profit projection. All based on internet bandwidth trading technology that was less than imaginary, and a bunch of trading sharks keeping the lights on by fleecing California with manufactured shortages. Arthur Anderson, rather than blowing the whistle on Enron had been sucked in. They'd dabbled their toes where it seemed safe and shallow to make a few extra bucks overlooking some minor auditing discrepancies, but soon found themselves over their own heads, far too deep to draw breath for that whistle without drowning themselves. Almost no business press wrote anything the least bit sceptical of Enron's success for far too long, until it was far too late to save the retirements of so many workers and investors. Who would dare? They were churning out double digit profit growth year after year, you would look like a fool gainsaying that.
The housing bubble has been much the same, but just not focused on one company. A set of magical investment vehicles like credit default swaps are ginned up, and essentially through their complexity and opacity allow the market wizards to sell things to people who would never buy them if they had any idea what they were really buying. But, for awhile, they "work" and the early adopters make money, riding the top of the expanding bubble. This attracts the rest of the market, which initially speeds the growth but also spells doom. Much like Enron's energy traders taking ever more daring steps to screw up California's electricity market, the lenders must ever escalate their willingness to push out loans to people ever less likely to pay them back. Worse, they must cheat these borrowers by ever more ridiculous terms in the bait-and-switch of low to high interest rates. After all, who wants to buy another bundle of debt unless you know it will pay off even bigger than the last one when the initial low-interest period on the mortgages ends? This only increases the certainty that the debt is bad, because the basic laws of economic thermodynamics have been broken: those poor people simply can't pay 9% interest on their mortgages when the 3.5% period dries up. Any idiot should have known that, but not when Lehman Brothers with its 100+ years on Wall Street is still buying, who doesn't at least think "they must know something I don't."
In this story, Alan Greenspan plays Arthur Anderson. Having lived his life on Ayn Rand's bible of stupidity, he has initially refused to stem the tide and even when all signs point to apocalypse, he is now too emotionally committed to the course to give up. He's Captain Smith Galt, and no iceberg is going to stop him from getting to New York in record time. All the while, most of those who would be sceptics bite their tongues for fear of gainsaying Greenspan the Grey.
The Role of Republican Economics: Financial Alchemy
The common thread of Phil Gramm, Alan Greenspan and for that matter the guys who told Herber Hoover the roaring 20s would not end either is that on some level they are enamoured in this "magic of the market" bullshit they sell. They really do think that some set of sufficiently complex monetary transactions can move $100 from Toronto to New York to Boston to London and have $110 or $150 come out the other end. No value-adding work required.
You may be thinking that they are cynical movement aristocrats who actually want to increase inequity, and cause middle class strife and that's true. It doesn't preclude the previous sentiment here either. Authoritarians can happily believe in condradictory things, or they can simply figure they will win however it turns out. If they can't turn lead into gold, they can still paint the lead and find a sucker willing to buy.
So it is no surprise that the deregulations they propose are always designed to facilitate bubble economics. Actual economic stimulus is unglamourous. It requires building infrastructure, and promoting an educated population, and ensuring they have decent health care to actually show up and work. It's much more fun to make the Statue of Liberty disappear or walk through the Great Wall of China, in a regulatory sort of way. It's always been easier to make money selling snake oil as a cure for disease than actually discovering cures for disease. After all, in an unregulated environment, even if you do cure a disease, the snake oil guy will just steal your idea and sell it too.
Grounding Market Realism - Lancing Boils Sooner
So the challenge is to keep these scams on the ground, at the 3-card Monte level of absurdity before they've sucked in all the semi-willing victims of Wall Street. Economic thermodynamics. The market can only grow, in the long term, as fast as the total economy. If GDP is only growing 3%, we must be suspicious of a sector growing 10% year after year unless we can adequately explain it by showing what other sectors are also shrinking.
This is economic thermodynamics. Rapid growth is possible, but only where we can see the actual source of the wealth being generated. So if someone invents cold-fusion, artificial intelligence, a pill that adds 50 IQ points or the next generation's equivalent of the assembly line, yeah, I'll believe in double-digit protracted growth. When some finance people coin a new technical sounding term for their latest imaginary product that they will sell back and forth to each other with no discernible real economic foundation, I'm calling for my lance and bracing for a lot of oozing pus. |
