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So I have a question that was posed to me recently, that I want to pose to DKos as well: are savings-glut induced bubbles the inevitable result of the success of supply side economics?

More and more I see Republicans using the concept of a savings glut to explain away the housing bubble.  The idea here is that there was a whole pile of money looking for somewhere to invest- which created a demand for investments, which drove the prices up on those investments.  Once prices started going consistently up, investors naturally assumed they would always continue to go up, and we got a bubble.

Now, let me say up front that I don't believe this explanation.  If you ask me what the cause of the bubble was, I'd respond easy credit from the central banks, lax regulation, and fraud (especially on the part of S&P and Moodys, in giving false triple-A ratings on CDOs that were no where near that safe, in return for consulting money).  But leave that aside for the moment- assume that the Republican story is true, that a savings glut caused the bubble.

Isn't that exactly what supply side economics tried to do?  The idea of supply side economics, as it was explained to me, was that if we put a lot of money in the hands of the investor class (aka rich people), they would invest it- naturally, in building more plants and hiring more people and improving the economy for everyone.  Except that what seems to have happened once the investor class got a large chunk of money is that, instead of investing it in economically useful things, like factories, they invested it first into a large collection of badly thought out web sites, and then in mis-rated junk bonds requiring federal bailouts.

There is a disconnect somewhere- either St. Ronnie I was wrong, and supply side economics doesn't work, or the defenders of King George II are wrong, and the bubble wasn't caused by a savings glut.

Inquiring minds want to know.

Originally posted to bhurt on Tue Aug 05, 2008 at 04:01 PM PDT.

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Comment Preferences

  •  Concept Misplaced (7+ / 0-)

    There probably isn't any relationship of the sort you're trying to find, despite the fact that supply side economics doesn't work at all.

    Bubbles in financial markets go back some 400 years, with the famous "tulip-bulb" bubble in Holland occurring in the mid-1600s.  Clearly, supply side economics was not a factor in Holland over 400 years ago!

    Typically, bubbles occur due to a lack of suitable regulation that breeds over-exuberant speculative investment in certain arenas.  The stock market crash of 1929 was one such bubble and caused the creation of the Securities & Exchange Commission and the Federal Reserve margin regulations to reduce the "fluff" factor in the stock market.

    The S&L crisis resulted from the same thing -- lack of adequate regulatory oversight.  

    Today's oil crisis is occurring for the same reason:  speculation in markets creating volatility that was never previously there due to the elimination of oil futures trading regulation promoted by the Bush Administration, coupled with virtually no regulation of some monstrous pools of capitals such as those associated with hedge funds.

    It's all about speculation and the lack of regulation.

    Those are the things that cause "bubbles" in financial markets.

    •  True, but the tendency of investment (0+ / 0-)

      to gravitate towards speculation instead of actual CAPITAL investment, combined with the supply-siders' insistence that regulation hinders markets inevitably will increase bubbles (and prevent supply-side economics from ever working).

      Silence is not an effective reply to propaganda.

      by fleisch on Tue Aug 05, 2008 at 06:03:37 PM PDT

      [ Parent ]

  •  You should post a tip jar (6+ / 0-)

    Now that that is out of the way, they are BOTH wrong.  Supply-side (e.g. "piss-on-you") economics is completely bogus.  Chimpy's dad called it "Voodoo Economics," back in the day.

    The housing bubble certainly was not caused by a savings glut.  Nobody below the top 10% has anything saved.  It was caused by fraudulent paper repackaged and resold...i.e., by the gutting of the Glass-Steagall act by McCain's first choice for economic advisor, Phil Gramm.

    A few links:

    http://www.truthout.org/...

    http://www.motherjones.com/...

    http://www.truthdig.com/...

    http://www.texasobserver.org/...

    Our economy is a house of cards. Don't breathe.

    by Youffraita on Tue Aug 05, 2008 at 04:17:04 PM PDT

  •  Yes. Yes they are. (1+ / 0-)
    Recommended by:
    justCal

    When we had the New Deal in place, we did not see these bubbles. After 1980, we have.

    The New Deal worked. It's time we returned to it.

    I'm not part of a redneck agenda - Green Day
    Neither is California High Speed Rail

    by eugene on Tue Aug 05, 2008 at 04:29:41 PM PDT

  •  Long history of bubbles (1+ / 0-)
    Recommended by:
    stagemom

    Back to the tulips at least.

    "let's talk about that"

    by VClib on Tue Aug 05, 2008 at 04:31:06 PM PDT

  •  They're both wrong (1+ / 0-)
    Recommended by:
    Steve Love

    There is a disconnect somewhere- either St. Ronnie I was wrong, and supply side economics doesn't work, or the defenders of King George II are wrong, and the bubble wasn't caused by a savings glut.

    Supply side doesn't work. When you put all the money in the hands of a few people at the top, they keep it, and  to the extent that it's invested, it's invested in ways designed to make them more money without expenditures on capital investments like plants, equipment, etc., at least not here in the U.S.

    As for a savings "glut", that's a complete fabrication.  The U.S. has one of the lowest household savings rates in the world (considering industrialized nations).

    "They that can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety." -- Benjamin Franklin

    by Mr Tentacle on Tue Aug 05, 2008 at 04:39:45 PM PDT

    •  They likely confuse supply side voodoo because (3+ / 0-)
      Recommended by:
      stagemom, frisbee, Mr Tentacle

      of the fact that its usually commodities that are the focus in bubbles.  

      Tulips.  Real estate (in 80s and 00s) - though actually the commodity was cheap borrowing/easy money.  Oil. Etc.  Commodities usually don't spoil and so are easily abstracted into paper (though there have been food bubbles, but they are very short term and during scarce times like war or famines).  If you can't store it while you trade the paper that represents it, its hard to get a speculatory inflation of price, which is what a bubble is.

      Because supply side supposed has something to do with something that sounds like it would be commodities, it is natural to think bubbles might be somehow linked to it.  And it probably has been a cause of recent bubbles.

      But to say that it is because of its 'success' is laughable.  S/S didn't 'succeed' even by its own meager standards.  The reason we had more commodities and lower prices was 1) deflationary pressure in the 80s due to first falling demand then oil prices, and 2) globalization - which along with the waning and then end of the Cold War put a lot more resources on the world market.

      Finally, saving glut???  WTF?  Savings rate have been 1% or less for decades IIRC and negative the last couple.  Yeah, that's like a 'glut' if it were completely the opposite of what it is.  

      Sheesh.  Where do Repukes come up with this nonsense?

      •  Yeah, but the rich have lots more money (2+ / 0-)
        Recommended by:
        justCal, Mr Tentacle

        and nowhere good to put it. That's the cause of the bubbles.

        If the middle class had income gains, the economy would grow and there would be lots of good investments around. If the rich get all the money, they won't spend more (they already have all they want), so they put it in speculative hedge funds and buy collateralized debt obligations backed by sub-prime mortgages and other things.

        A lot of money with not much good to invest in leads to bubbles in the few good investments that remain.

        You cannot depend upon American institutions to function without pressure. --MLK Jr.

        by Opakapaka on Tue Aug 05, 2008 at 06:08:48 PM PDT

        [ Parent ]

        •  Well, yes and no, but I didn't and don't diagree (1+ / 0-)
          Recommended by:
          Opakapaka

          with you as far as you go.  I just tried to go deeper into the answer, including why the right mistakenly thinks supplyside was a 'success'.

          One quibbles: the housing bubble wasn't caused by just the rich thorwing $, but at the system lulling as many middle class as it could into also throwing $ at real estate, $ they did not have but could hide not having behind the inflating 'value' of real estate (which inflation was produced most - after a point - by the $ that was 'produced' from cashing in the inflation of the value of the real estate and round and round).  If it had just been the rich's $, few would care but Repukes and it wouldn't be cratering the economy.

          IOW, the rich may provide the $ to start bubbles, but they don't make the bubbles. Rather, they make $ off the bubbles by suckering everyone else into it just as they are pulling thier original at-risk capital out.  Typical Repuke/CorporateState pyramid scheme.

          •  It's so sad (0+ / 0-)

            how many people now own homes they can't afford, probably having paid twice what the homes are really worth. Now they lose the home and are left with nothing, and their credit history destroyed.

            You cannot depend upon American institutions to function without pressure. --MLK Jr.

            by Opakapaka on Wed Aug 06, 2008 at 08:44:18 PM PDT

            [ Parent ]

            •  But, they do get a tax bill, since IRS often (0+ / 0-)

              treats the loss of debt as a gain in income. ;)  Nice how all those people the Rethugs suckered into voting for them as they enabled the 'bubbling' get that last little F***You, ain't it? Lots of people got stung by that in the S&L 80s.  Yet, they voted for Rethug Congress and then BushCo a few years later.

  •  Only sort of ... (0+ / 0-)

    Supply side was supposed to do exactly that but only in very specific circumstances. Conservatives stripped off the requirements and just applied it everywhere.

    With those specific circumstances missing, of course the wealthy didn't do the "supply side thing". They didn't invest in building anything new. Instead, they invested (gambled) on the value of existing stuff. Huge cash influx + fixed asset pool = bubble.

    So savings had nothing to do with it, unless you count giving money to rich people as "savings" (middle/lower class savings/assets have actually been dropping for years).

  •  Not really (2+ / 0-)
    Recommended by:
    BobOak, farbuska

    Bubbles are caused by easy monetary policies (i.e. too much credit). Without easy credit people would be much less incline to speculate.

     However, you do have one thing right - if we had a real middle class and the rich were getting taxed progressively, then all that credit would turn into general price inflation rather than bubbles.
      The reason I say that is because the money would be getting directed at the middle class, which are more likely to spent it on commodities and consumer goods. When the easy credit gets directed at the rich, they are more likely to turn it into speculation.

    The forest precedes man, the desert follows him

    by gjohnsit on Tue Aug 05, 2008 at 05:10:35 PM PDT

    •  But we are seeing inflation, (1+ / 0-)
      Recommended by:
      BobOak

      even though it's hidden in the official numbers. That's because countries in Asia (China, India, etc.) middle classes who are receiving big pay raises.

      This, and resource depletion, are the root causes of the commodity bubbles.

      The real estate bubble was created by the Fed (negative real rates for years) to prop up a failing economy after the tech bubble popped.

      You cannot depend upon American institutions to function without pressure. --MLK Jr.

      by Opakapaka on Tue Aug 05, 2008 at 06:15:57 PM PDT

      [ Parent ]

  •  Their primary goal is to get the greatest ROI (3+ / 0-)
    Recommended by:
    VClib, frisbee, Steve Love

    So they start off with a motivation that is good for them and may or may not be good for workers. Both human capital and financial capital are more mobile than ever before thanks in large part to technology.

    Both China and India are growing rapidly, not at the espense of those who can afford it most, but in large part at the expense of the U.S. middle class.

  •  All comments so far are right on. (1+ / 0-)
    Recommended by:
    justCal

     There is another aspect that needs to be mentioned.  Beginning with Reagan and the culture of greed, the investment community moved away from long term investments, the buy-and-hold stock strategy; to short term investments, buy-and-hope-for-a-higher-bidder stock strategy.  This resulted in the hiring of CEOs who were better at PR than in managing corporations for long-term value and corporate Boards of Directors moving from being the protectors of stockholder values to a gang of insiders willing to victimize the rest of the stockholders to make a killing from option cash-outs.  Assuming debt was considered a mark of managerial excellence. [Hell why worry, we are gambling with other people's money!] Wall Street became Las Vegas East and the WSJ became a propaganda organ for the fleecing of the American middle class.
       What resulted was a bloodbath of corporations that were bought, dismantled and sold piecemeal, shipped overseas to avoid environmental standards, taxation and regulations or were pushed to unsustainable business practices or outright violation of the law for that momentary stock spike in which those first in made a killing and those last in get left holding the bag.
       All this made possible by the repeal of the regulatory machinery put in place by FDR...thank you, Phil Gramm.
     

    ...Former candidate for Congress.

    by Steve Love on Tue Aug 05, 2008 at 06:10:46 PM PDT

  •  trying to get money, not a glut (0+ / 0-)

    Speculative bubbles are people trying to get money, not that they have quite a bit lying around.  Try deregulation, lack of monitoring of ethical business practices, new exotic investment vehicles and people trying to make a fast buck.  The good old fashioned tortoise slog incentives have been removed.  One no longer has career, financial security, income stability.  One can lose their career on a CEO whim, their entire financial livelihood, retirement obligations can be cast aside by employers or simply not provided at all.  Work and putting the incentives on making things (manufacturing) has been cast off in favor of chasing the hare or trying to make the fast buck.

    Hence, one gets the dot con and now the real estate bubble.

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