Same Economy, Different Bubble
from the and-it's-going-to-pop dept
Last year, The Onion (which has a knack for predicting the future in really scary ways) had an amusing article: Recession-Plagued Nation Demands New Bubble To Invest In. In the immortal words of Homer Simpson: “It’s funny ’cause it’s true.” And, indeed, one of the big fears we’ve had since the beginning of the government’s response to the financial crisis is that it hasn’t been doing anything to solve the real problem of a lack of transparency. Pumping more money into the system without fixing that simply meant that we’d repeat the cycle, with the money eventually finding some bubble again.
At this point, it’s worth taking a step back, and understanding why these sorts of bubbles occur. Sometimes, investment bubbles can actually be quite beneficial. In markets of true innovation, where a clear success story or business model hasn’t yet been worked out, a bubble allows a lot of money to be thrown at the problem at once. From that, you get a lot of ideas tested in the marketplace very rapidly. Many of them fail once the bubble collapses, and many investors lose money, but the ideas that do work and do stick around tend to takes us forward in leaps and bounds. Bubbles in innovative technologies function as a form of speeding up the innovation process and getting lots of infrastructure built and ideas tested rapidly. It’s no fun if you’re caught on the wrong side of the investment, but for society, it can be a net gain.
However, that’s not what happened in the last economic crash. That was built on a different sort of bubble, based not on funding innovation, but on a series of arbitrage plays where bankers actively worked to obfuscate risk, so that it could be passed on to the latest sucker. Basically, they kept taking riskier and riskier assets, and packaged them in a way that they looked less risky. Then, by making it so no one could really look at (or understand) the true risk, they could sell these super risky investments off to suckers at prices as if they were safe. And, since such a house of cards takes a while to collapse, it doesn’t take long for everyone to pile in, feeling like they have to match those returns.
So, the answer to this is to increase transparency. If you could really get the information out there, such that people could look at the underlying details and properly calculate the risk, not based on random clueless rating agency employees, but in a true market, then it would be that much more difficult to pass off and misprice super risky vehicles as safe.
But that’s not what’s happening. Without any efforts at increasing transparency, combined with pumping a ton of new cash into the market, we’re getting another bubble. The bankers are still operating the same way they did in the past — which is looking for ways to obfuscate the risk and find new suckers to take the risk off their hands without really understanding how to price that risk. It may be securitizing life insurance or it may be in the carry trade. It doesn’t really matter. The money is looking for a new bubble and a focus on short term profits over long term sustainability — and that’s enabled by allowing banks to play “hide the risk.”
This is really quite worrisome. It’s been over a year since the financial crisis went into panic mode (even if the actual recession and problems significantly predated that). And while the “worst case scenario” did not occur, there’s been little evidence of real fixes to the economy or any attempt to really fix the factors that resulted in the original problem. Instead of creating transparency and a long term strategic focus, we’re just pumping cash into the economy to try to help suckers find the next bubble.