Monday, June 20, 2011

Bubble Economics (Whose Bubble Was It?)

I read an excellent piece about bubble economics by Jonah Lehrer in Wired, received via BigThink.

A couple of aspects of bubble dynamics that aren't part of the public discussion, or are discussed too little (more about the why below):

1. Narrower concentration of larger and larger pools of investable wealth (investable = excess wealth beyond necessary living costs) creates greater instability, as was proven during the volatile "gilded age" prior to the creation of correcting regulations and moderating bodies under both Roosevelts and other presidents. Narrower competing investor groups tend to see-saw markets more quickly and pit too much investable capital against too few plausible investments.

2. Bubbles are bound to emerge when there is a rush to scoop up limited plausible investments, and plausible investments are bound to be fewer when the consumer market is relatively impoverished or has a weaker growth of income per rising necessary costs, as occurred post 1980.

3. Consumer incomes will reach a critical point when their income is rising more slowly than necessary costs (food, fuel, housing, education, healthcare). That critical point was delayed but made more critical by access to credit, and the cynical manipulation of that credit.

4. When the worker/consumer economy flags and there is no effort to counter that weakness, what does the investment class do? Does it take its enormous income rises and tax cuts and invest in goods and services (jobs) here in the U.S.? No. They have every motivation to hold (as they are now holding trillions) and wait for further depression of wages; they will also hold rather than invest in production where demand is slack. They will instead invest in other markets, like Asia and South America, which is what is happening now. (It's ironic how they manage to do so while wrapping themselves in the flag.)

5. Is it fair to call this recent bubble a middle class housing bubble? I don't think so. It didn't burst; it deflated. Promised prosperity stopped materializing. The middle class and working class economy stopped getting air in the form of wage and income rises. Wages and incomes ceased to be robust enough to enlarge the economy. Housing costs continued to rise based upon demand (partly demand for credit access and the added usefulness of real estate as collateral), based upon expectations workers were fed, empty cheerleading by economists about an economy the working class had been shut out of. Bubbles are filled by excess income. The working and middle classes have had lagging incomes for thirty years, so it wasn't their bubble.

6. I think another critical point was reached when baby boomers began shifting retirement savings out of equity markets into treasuries and other safer or more arcane securities (gold, real estate, newer magical financial instruments).

7. Lehrer's description of herd behavior is apt. What I don't hear discussed is the basic counterbalancing role of government, to invest and regulate countercyclically. A more apt analogy than tulips and fads would be the familiar model of the overloaded Indonesian ferryboat, where the near swamping on one side will cause a sudden and catastrophic rush to the opposite side of the vessel and a rapid capsizing. Economies need large institutions with no profit motive or profit requirement to act countercyclically. IN A RECESSION THE LAST THING YOU WANT GOVERNMENT TO DO IS SPEND LESS. Everyone else is spending less. To get out of recession government needs to counter that natural thrift instinct and spend more. I hear no one saying this. I hear no one speaking about the key countercyclical responsibility of government. In a healthy economy public and private institutions would know that role and fill it.

8. I can only assume that the guiding motive of the powers on Wall Street who are controlling the American economy isn't to right the economy and keep it seaworthy; it's to jettison more people, to swamp more lives, to lower wages, to panic small investors out and purchase their holdings cheap, too offload American capital and invest it elsewhere. (Borrowing a scenario from Germany in the 1930s, to invite the oppressed to sell their goods to their captors dead cheap. Where they are going they won't need their things.) I think the Republicans and their clients have exactly the economy they wanted. They are safe and dry and they find it easier to deal with other parties who are treading water.

I notice this. I don't read it being reported. I don't hear it being discussed. I write about this. But who am I? I am not an economist. I am a writer. Economists know which side their bread is buttered on. Controlling the incomes of a mandarin class allows concentrated wealth to shape the public mind and the public conversation how they like.

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