Tiny Bubbles

By: Scott J. Berry Wednesday, December 31, 2008 11:37 AM

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My vote for 2008 word of the year is bubble. (With Ponzi scheme being a close second only because it’s top of mind right now.)

We’ve seen so many bubbles come and go, many bursting in the last year. Housing bubble, stock market bubble, CDO bubble, Wall Street salary bubble, debt bubble, and now a divorce bubble. Kind of makes you nostalgic for the Internet bubble, doesn’t it?

We’ve even had a labor bubble. In the auto industry, most of today’s at-risk workers should have been laid off years ago as Detroit rationalized its businesses. Instead, GM et al hung on for dear life and the labor force remained too large while the air went out of the market. Now we’re facing all of those job losses at the same time.

Like a tub full of soap suds, these bubbles have decayed into a single, giant, “mother-of-all” bubble. Which, naturally, has popped in turn. And as Paul Krugman wrote recently in a New York Times op-ed, there aren’t any more bubbles left. No wonder we’re in such a mess.

It’s not for lack of trying, though. We want things to go back to the way they were before. Despite what they might be saying, the Treasury, the Fed, Congress, and others are all essentially trying to re-inflate the world. Refinance mortgages! Force banks to issue more debt! Buy distressed assets! Stop foreclosures! Loosen credit and people will spend money! Get house prices back up!

(Isn’t this what got us into trouble in the first place? Do we really believe that easing credit will get people to buy cars when they’re worried about whether they’ll have a job?)

But the rips in the fabric are too large, and our sources of air are far too small. Using TARP and other Fed/Treasury funds to re-expand the “mother bubble” is like trying to fill a hot-air balloon with a bicycle pump.

Worse yet, every one is now lining up for their bowl of gruel–finance firms that want to be bank holding companies, auto executives trying to build cars no one will buy, mall owners who can’t pay their mortgages, etc. Who’s next, I wonder?

Please sir, I want some more.

Despite the comic relief I got watching auto execs jump through hoops for doggie treats (or this gem of a parody here), that way lies madness.

Even if we could find a big enough pump, prices have to reach a bottom eventually, so markets will clear.

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12/31/2008 10:33:23 PM Leverage amplifies oscillations by aximoron Is not excessive leverage (in all its overt and covert forms) a root cause that amplifies "natural" economic oscillations? I assume small oscillations arise anyway because of implicit feedback delays in the economic system. It seems strange to me that we live in a world where we have all these taxation and regulatory distortions but many suggest we need only to rely on interest rates to "dampen" both "bubble" creation and subsequent collapse. Why cannot explicit leverage levels be used as a regulatory tool as well? That is vary them as economic conditions change as well as interest rates? It is surely obvious that leverage levels of 30 to 40 to one that the wall street investment banks finished up with were highly unstable, as were 100% house mortgages for home owners, but when they are linked in a daisy chain and "insured" by "hope and a prayer" CDS's.... we are talking about an obvious outcome. The difference between leverage and interest rates being that the former explicitly limits investor expectations and perhaps more importantly provides a buffer (read damper) in the face of unanticipated asset price declines. A few words with the benefit of 20/20 hindsight from a biologist who is well versed in feedback systems. Reply Rating: (0) (0)

Is not excessive leverage (in all its overt and covert forms) a root cause that amplifies "natural" economic oscillations? I assume small oscillations arise anyway because of implicit feedback delays in the economic system. It seems strange to me that we live in a world where we have all these taxation and regulatory distortions but many suggest we need only to rely on interest rates to "dampen" both "bubble" creation and subsequent collapse. Why cannot explicit leverage levels be used as a regulatory tool as well? That is vary them as economic conditions change *as well as* interest rates? It is surely obvious that leverage levels of 30 to 40 to one that the wall street investment banks finished up with were highly unstable, as were 100% house mortgages for home owners, but when they are linked in a daisy chain and "insured" by "hope and a prayer" CDS's.... we are talking about an obvious outcome. The difference between leverage and interest rates being that the former explicitly limits investor expectations and perhaps more importantly provides a buffer (read damper) in the face of unanticipated asset price declines. A few words with the benefit of 20/20 hindsight from a biologist who is well versed in feedback systems.

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