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.

Handling a Manic-Depressive Economy

For half a century it was the successful policy of the U.S. government to moderate the moods of the economy, mostly to keep the economy from dropping into a depression, but also to keep it from overheating. To act as a thermostat. This required government to modulate markets, to soften the hardship and deprivation at the low end of the cycle and rein in the excess reward at the upper end––something it's much harder to do because the rich investor class has thousands of lobbyists working to keep the upper end from any moderation however rational. When there is excess pressure in one direction it's necessary to pull in the opposite direction. This is what keeps boats afloat and cars on the road.

COUNTERCYCLICAL. Try Googling that word and you don't come up with much. A few arcane economic articles available in PDF. One of the most important jobs of government is to counter the irregularities of the economy. Prior to the regulations inaugurated in the early 20th century the U.S. economy had catastrophic nationwide bank panics every few years. These panics ruined millions of people and threw millions more out of work, broke up families, bankrupted thousands of farms and businesses, saw towns dry up and disappear, and precipitated waves of suicide and child abandonment.

The veers and spikes of the economy allowed a few speculators to become enormously wealthy. Bubbles inflated and popped leaving millions in the hands of a few clever people. Sometimes the speculators precipitated the bubbles and the panics in order to profit from them. Regulation put an end to the worst predatory market behaviors and ushered in the long period of broad prosperity that characterized the best half century in American history. It was a bit boring, perhaps, but homeowners and families don't benefit from financial rollercoasters. The dismantling of those regulations in the years after Reagan took away or weakened the countercyclical tools of the federal government and ushered in poorer labor markets, more fluctuations, more bubbles, more Wall Street misbehavior and led to the near collapse of 2008-2009. If the government had a stronger hand we'd be recovering more broadly now, but Reaganism has concentrated the recovery at the top. We have a topheavy poorly balanced economy that is more unstable and less seaworthy.

Unregulated economies sometimes behave like those overloaded ferries that occasionally capsize in the straits of southeast Asia. When they become overweighted on one side, everyone rushes to the opposite side and the craft capsizes. In moments of imbalance the craft needs a counterbalance to remain afloat. In the economic context this is the job of government. To put weight on the side that everyone is rushing away from. To spend money when everyone is afraid to. To spend money in areas that are slack, on necessary infrastructure that has been neglected––even when there is a shortage of revenue to do so. That is a function only government can fulfill, because government works over longer spans of time and across broader areas. Government thinks in terms of economic climate patterns rather than the weather of the moment. Across the United States one year's drought will visit another region next year. Knitting smaller regional markets and different sectors together helps keep the broad economy afloat.

Government's job is to moderate the spikes and the depressions, to balance the interests of different sectors, and it's foolish to take that capability away. There is a name for that do-nothing philosophy. Herbert Hooverism. Government isn't the enemy in an economic crisis. As was seen in the worst weeks of the crisis, government is essential, and never more essential than when free markets fail. We need a better vocabulary for explaining this. A better set of descriptive models. The government is a sure hand on the steering wheel, a thermostat to keep the house livable summer and winter. The government is also fire and police and public health departments when things go wrong. But this countercyclical role of government, this balancing mechanism, is key and little discussed. It needs to be part of the public conversation. When no one is spending is the most important time for government to keep money flowing in the economy. Government is the only entity that can and will work in opposition to the frightened impulses that have us paralyzed. Countercyclical is a cumbersome word. Maybe we need a better one.