Perhaps you've heard about the Tale of Two Cities
a novel by Charles Dickens, set in London and Paris before and during the French Revolution. It depicts the plight of the French proletariat under the brutal oppression of the French aristocracy in the years leading up to the revolution
Or maybe you've heard of the theory of the Haves and the Have-Nots
The share of total income going to the top-earning 1 percent of Americans went from 8 percent in 1980 to 16 percent in 2004.
...
One reason: gains in the stock market. Affluent people own more stocks, and executives are often paid in stock or stock options. So when the market does well, their wealth accelerates quickly
Well, Bill Moyers is currently telling the historic Story about the Need for "Two Banking Systems" ...
The Tale of Two Banking Systems ... if only, BOTH principles were understood ...
Bill Moyers Journal - April 24, 2009
What Would You Ask New Pecora Hearings to Investigate?
Pecora investigation
The Senate committee hearings that Pecora led probed the causes of the Wall Street Crash of 1929 that launched a major reform of the American financial system.
Moyers Video
SIMON JOHNSON: I would add on a proactive, going forward basis, ask the following question: Do we really need a banking industry that takes these kinds of risks? Professor Joe Stiglitz of Columbia, for example--
BILL MOYERS: Nobel Laureate.
SIMON JOHNSON: Nobel Laureate is proposing -- proposed to the Joint Economic Committee in his testimony on Tuesday think about splitting financial services into two parts: a public utility model, which is where you put your money and where-- that's what handles payments. That doesn't take any risks. It runs like a utility. It's low risk, low return from an investor point of view. It's boring.
In fact Paul Krugman has a great line on this. Make banking boring again. And they're talking about that part of banking. But, at the same time, both Professor Stiglitz and Professor Krugman would emphasize, and I would absolutely want to second, that you need some risk takers. And you need some people to provide money to risk takers. And the good news is we have a very strong entrepreneurial sector in this economy. We have venture capital in this economy. And they've got a great attitude and maybe sometimes things go wrong. We have bubbles there. But, the dot com bubble and the bursting of that didn't do anything like the kind of damage that this debt finance bubble has done. Venture capital is about equity. Wall Street has been much more about debt.
And we need to be able to-- we need those entrepreneurs also to be able to go public. So, we need ability to raise capital, bring in investors, go public and sell your shares to people. That doesn't have to be part of the banking system. Boring banks and risk taking with the risk full disclosed. And maybe we have to work, you know, and that was the core idea as I understand it of the 1930's. A lot more disclosure around what are you selling exactly. And what are the problems-- potential problems and what are the conflicts of interest at stake.
More disclosure I would guess on the securities side. That's where you take the risk. We want the risks, this is an economy based and society based on risk taking. But, our banks don't have to be risk takers. In fact, it turns out, they don't understand the first thing about risk.
MICHAEL PERINO: Yeah, this is an important point to keep in mind. If you look back at that period in the 1930's, you see banks taking on these kinds of market risks, and they're doing it with leverage. The same thing we're really seeing today. But, the point you made about markets and entrepreneurial spirit is one that we have to keep in mind in all of this. Back in the beginning of the Roosevelt Administration, there were two sets of advisors.
One set of advisors basically said, we need to have a command and control economy. We need to have a regulator in Washington who decides which portion of the economy is going to get capital. And then within that portion of the economy, which are the right companies to get which amount of capital? The other group said, no, we can't be in that business. The business we need to be in is we need to let the market work to the extent that it can. And the way we're going to let the market work is we're going to tell people exactly what the material things they need to know are before they buy or sell these securities. And then we let them decide.
And, you know, this is a point that President Obama made recently when he was in Europe. He said, We can't forget the fact that, you know, markets do good things. And they're useful things to have. Which doesn't mean they're completely unregulated. But, it doesn't mean we abandon them either.
(Emphasis added)
http://www.pbs.org/...
Michael Perino. A scholar of Law and Securities Regulation, Michael teaches at St. John's University here in New York, and has been an advisor to the Securities and Exchange Commission, the government agency that was created because of the Pecora investigation.
Simon Johnson, former Chief Economist at the International Monetary Fund who now teaches at MIT's Sloan School of Management. Just this week Simon Johnson co-founded "The Hearing," a new economics blog at washingtonpost.com.
The Hearing -- Decoding the Economic Policy Debate (on WashingtonPost)
SO these Economics Experts are advocating for 2 Banking Systems:
- the Boring, Safe, Utilitarian, Money-Protecting kind
AND
- the Exciting, Risky, Speculative, Money-Growing kind
Seems pretty smart. Rational. Especially IF the History of "Bubble Economics" is ever going to be any Guide. It's good to see that even President Obama sees the dichotomy and the inherit value of both kinds of Capitalism Markets.
The History of "Bubble" -- the Cycles of "Boom and Bust", as Obama has called them -- has many Economic lessons, we need to learn from ...
Barack Obama:
The one thing I don’t want to do is to replicate the false confidence that was premised on bubbles. ... how do we prevent this froth that builds up and go back to steady growth, fundamental growth that’s based on making things, providing good services, innovating, exporting -- as opposed to just borrowing and leveraging?
You see, we cannot go back to endless cycles of bubble and bust. We can’t continue to base our economy on reckless speculation and spending beyond our means; on bad credit and inflated home prices and over-leveraged banks. This crisis teaches us that such activity is not the creation of lasting wealth — it’s the illusion of prosperity, and it hurts us all in the end.
(Emphasis added)
http://www.dailykos.com/...
The real "value" of speculation ...
The History of "Bubble" -- the Cycles of "Boom and Bust", also has many lessons for individuals too, especially for those who get caught up in its web. Betting on the Hottest Trend, may seem an "easy way" to transition from the Camp of Have-Nots to the Haves -- But buyer beware. The Big Wheeler-dealer Institutions are about 5 steps ahead of you in that game -- always. And rarely is it THEIR MONEY at Risk!
(The current collapse of the Housing Market, demonstrates with graphic effect, how so many of the Have-Nots "were simply Played". The collapse of the Market value of 401k retirement funds, is another all-too-real example for many -- in that sad Tale of Two Cities.)
Humanity has been subject to these Goldrush whims of the Market, for as long as, well, there have been Markets. Markets open to both buyers and sellers, each trying to best the other, in the competitive game of Capitalist Checkers.
When the wealth that Bubbles create is based on little more than Greed, Leverage, and Speculation -- who really benefits in the long run? Real wealth results from creating things, not just from trading things. Real wealth is based on real work -- not short cuts.
Look out, when the Bubble finally pops ...
Sooner or later, any "hot commodity" -- ends up
being, not so hot ...
History of full of examples of such speculative "Boom and Bust" Cycles:
(perhaps you've heard of a few of these?)
- Tulip mania (top 1637)
...
- Railway Mania (1840s)
- Florida speculative building bubble (1926)
- 1920s American Economic Bubble (circa 1922-1929)
...
- Sports cards and comic books in the 1980s and early 1990s
- TY Beanie Babies (1996)
- The Dot-com bubble (circa 1995–2001)
- Japanese asset price bubble (1980s)
- 1997 Asian Financial Crisis (1997)
- United States housing bubble (as of 2007)
- Commodity bubble (As of 2008)
Economic bubbles are generally considered to have a negative impact on the economy because they tend to cause misallocation of resources into non-optimal uses. In addition, the crash which usually follows an economic bubble can destroy a large amount of wealth and cause continuing economic malaise.
The market patterns are the same, the results are the same, but somehow Humanity has trouble, learning History's Lessons. There are several theories why, Bubbles always reappear, sooner or later. Perhaps it's just Human Nature. Or perhaps it's just the lack of common sense Regulation. (Imagine the result of Super Bowls, if we took all the Football Ref's off the field -- Chaos!)
Here are some of the leading theories, for how and why Economic Bubbles form:
It has been variously suggested that bubbles may be rational, intrinsic, and contagious. To date, there is no widely accepted theory to explain their occurrence. Recent computer-generated agency models suggest excessive leverage could be a key factor in causing financial bubbles. ...
Greater fool theory
... According to this unsupported explanation, the bubbles continue as long as the fools can find greater fools to pay up for the overvalued asset. The bubbles will end only when the greater fool becomes the greatest fool who pays the top price for the overvalued asset and can no longer find another buyer to pay for it at a higher price.
Extrapolation
Extrapolation is projecting historical data into the future on the same basis; if prices have risen at a certain rate in the past, they will continue to rise at that rate forever. ....
Herding
... herd behavior, the fact that investors tend to buy or sell in the direction of the market trend. This is sometimes helped by technical analysis that tries precisely to detect those trends and follow them, which creates a self-fulfilling prophecy.
Liquidity
Others argue that the cause of bubbles is excessive monetary liquidity in the financial system, inducing lax or inappropriate lending standards by the banks, which then causes asset markets to be vulnerable to volatile hyperinflation caused by short-term, leveraged speculation. ...
(Emphasis added)
http://en.wikipedia.org/...
Talk about Herd Behavior, and perfect storm of "leveraged speculation" ...
... bubbles might ultimately be caused by processes of price coordination or emerging social norms.
[Ibid]
Some "social norms" can catch on quite quickly -- when "short cuts" to success are the theme of a culture (and Banks are primed and ready to fuel the stampeding Herd Behavior):
Here's the secret ... Wall Street traders, and Global Bankers know how Bubbles work. They encourage them, they fuel them, they invest in them, and then take the profits and run, leaving the "little guy" retail speculators, holding the tab. (Just ask anyone who bought into the 401k Retirement Dream):
The Nature of Bubble Markets -- East Bay Housing Bubble, Feb 29, 2008
By the way, that dotted Trend Line, labeled "Mean" is the Real Wealth long-term value of an asset. Every new Bubble Economy needs a basic "core of value" like that, in order "create a new get-rich dream", inflate the price, and then sell "the dream" to "the next greater fool".
Sooner or later, any speculative asset will return to its underlying growth mean trendline. It's Valuation must ultimately be based on more than "just hot air", in order to last.
Sometimes however, all that "Hot Air" takes a while to build up, before it finally "pops the Bubble" though, sadly:
The Herd of Humanity, changes directions, slowly sometimes, kind of like the Exxon Valdez [trying to] avoid the reef.
Someday the Herd of Humanity, may actually break free, from those "hidden reins" that steer our course. Or at least, we may learn the Cycles of "Boom and Bust", that the Elite Class routinely exploits ... leaving us with the bill.
Perhaps rationality will be imposed on the Markets again by the current Administration -- NOT every asset we acquire as a society, or as individuals, NEEDS to be made available to Leveraging and Speculation. Some of that Wealth (like our Homes, like our 401k, like our Pensions) NEED to be kept in Safe and Boring accounts and vaults. (call it a Lockbox, if you will.)
Hopefully, Giethner and Bernanke, WILL avoid the Over-Leveraging mistakes of the Past? Hopefully, Obama will put some REAL Refs (like Elizabeth Warren) back out on that "Super Bowl" Economic playing field, to ensure "Fair Play" is indeed occurring.
Investing in a College Education, is "usually" a Good Reason to go into Debt.
Bailing out your Frat Buddies' Gambling Debts, usually is NOT a Good Reason to go into Debt!
Which is it, going on now, behind that Treasury veil of obscurity, remains to be seen.
BTW, arendt has an interesting analysis about the "Limits of Leverage", according to principles found in Nature, specifically from Complexity Theory (the Science of Multiple Dynamic Variables and Stable systems):
Science: 5:1 Leverage is the limit. Geithner: Let's do 13:1
Reading that Diary, led me to this current analysis of Market Bubbles.
It seems like TOO Much Wealth Leverage, may NOT be a Good Thing, either. (Sometimes your reckless buddies, just need to take their medicine.)
For us Have-Nots, the faster we go -- the further behind we get!
Sooner or Later, we ALL need to Get Somewhere ...