Letter to Her Majesty: Suggestion for Low-Tech Apparatus for Economic Horizon-Scanning

To Her Majesty, The Queen

Buckingham Palace, London

Madam,

The disarming question you asked when you visited the London School of Economics last autumn – why did nobody notice that the credit crunch was on its way? – produced a thoughtful letter from the various authorities who gathered recently at the British Academy to ponder and draft a measured answer.

A panel of economists, regulators, market participants and journalists examined the usual suspects among the leading causes – global imbalances, technological optimism, deregulatory zeal, euphoria and hubris – and concluded that overspecialization among experts was the real culprit. The unanticipated virulence of the crisis derived from “the failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole.”

A new “horizon-scanning capability” was to be desired, the letter-writers said, “so that you never need to ask your question again.” Officials from the Treasury, the Bank of England, the Financial Services Authority, the Cabinet Office and the Department for Business, Innovation and Skills might well put their heads together to devise such a shared capacity to keep in sight the bigger picture, the letter-writers concluded.

With all due respect, Ma’am, I thought you might like to wish to see a parallax view. Journalists’ opinions sometimes differ from those of the experts whom they cover. That is the case here. A serviceable version of that horizon-scanning apparatus already exists. A longstanding tradition of literary and historical economics can be said to have given ample warning, not only that a crisis was to be expected, but, in this case, of the direction from which such a crisis could be expected to emerge. I am thinking of one book in particular

It was in 1978 that Charles P. Kindleberger’s Manias, Panics, and Crashes: A History of Financial Crises first appeared. A professor of economics at the Massachusetts Institute of Technology, Kindleberger, took as his epigraph a passage from Walter Bagehot’s “Essay on Edward Gibbon:”

Much has been written about panics and manias; much more than with the most outstretched intellect we are able to follow or conceive; but one thing is certain, that at particular times a great deal of stupid people have a great deal of stupid money…. At intervals from causes which are not to the present purpose, the money of these people – the blind capital, as we call it, of the country – is particularly large and craving; it seeks for someone to devour it; and there is a “plethora”; it finds someone and there is “speculation”; it is devoured, and there is “panic.”

In the nineteenth century, wrote Kindleberger, there had been hardly any more familiar topic in economics than financial crises. John Stuart Mill, Alfred Marshall, Knut Wicksell and, in the twentieth century, Irving Fisher had offered literary accounts of how speculative manias (“overtrading,” as it was known in the time of Adam Smith) might lead to crisis and collapse. After World War II, however, the topic had fallen into disuse and disrepair, because financial crises had become so few and far between. In the 1950s and 1960s, even recessions were mild and short-lived. Business cycle peaks often failed to produce any real crisis at all.

But since the sharp worldwide recession of 1974-75, Kindleberger wrote, interest in the topic had revived; an opportunity to re-open the discussion was at hand, especially if the frequency and severity of crises were to increase. He took the plunge. Though a historical and literary economist himself, Kindleberger employed a formal model devised by Hyman Minsky, a monetary theorist then at Washington University, in St. Louis, to demonstrate how the classical discussion could be linked to the modern mathematical tradition.

Among other monetary theorists, Kindleberger noted, Minsky was known as being “particularly pessimistic, even lugubrious” in his conviction that modern capitalism was forever prone to shake itself apart, but the important thing was that his model had the basic elements necessary to describe the mechanics of mania, panics and crashes, including a role for debt, especially the aggressive form of borrowing to acquire speculative assets known as leverage.

That so few crises had taken place in the century before owed to Bagehot himself, as much as to any other single person, wrote Kindleberger, for it was the legendary editor of The Economist who clarified and made respectable the concept of the lender of last resort. Bagehot wrote Lombard Street: A Description of the Money Market in 1873 to make the case that governments or their central banks could, from time to time, stop panic in its tracks when it arose by the simple expedient of being willing to suspend the normal rules and make more money available to those who wanted it.

To halt a “run,” explained Bagehot, whether on a bank, a stock market or, for that matter, on paper claims to wheat, coal, land or any other set of illiquid assets, all that was necessary was that, in moments of acute distress, the government should ease up on its monetary policy and indicate its willingness to lend money to those who wanted cash. Not just anybody, of course; sound collateral would be required. Not too easily available, either; the government would want to charge something more than was taken to be the going rate. Above all, not too frequently; a market that expects to be bailed out by a lender of last resort may take unwarranted risks.

“Lend freely but at a penalty” became the mantra of the Bank of England in response to crises, and crises quickly eased up. Bagehot’s book was so persuasive to practitioners and theorists alike that it was credited with halting panics for a hundred years – with the single exception of the Great Depression (in which contractionary monetary policy came to seem even more important than nations’ unwillingness to lend to one another.) No one familiar with “lender of last resort” and the multifarious inventive forms that successful interventions have taken in the past could have been surprised when the response to last October’s crisis suddenly produced a bevy of new terms such as TARP, TALF and P-PIP.

Ma’am, I will come to the point. In Manias, Panics and Crashes, Kindleberger brought Bagehot up to date (though he was much too modest to say so). Able to read five languages, he took a narrative approach. He started with the South Sea and Mississippi bubbles of 1720. He worked his way forward through the innumerable crises of the Napoleonic Wars and the globalization and industrial build-out of the nineteenth century. For a second edition, he added the German Wipper-und-Kipperzeit and Dutch Tulip mania on the eve of the Thirty Years War in the early seventeenth century. Now he had more than thirty cases of speculative mania giving way to crisis, involving all kinds of instruments – British Government debt; joint stock companies; import commodities; country banks; canals; export goods; foreign bonds; foreign mines; building sites; agricultural land; public lands; railroad shares; bank shares; discount house shares; initial public offerings; mergers; copper; gold; foreign exchange; new industries; buildings; commodity futures. In subsequent editions, his schema was summarized in a table, “A Stylized Outline of Financial Crises, 1618-1990.” How much of a surprise can it be that subprime mortgages and collateralized debt obligations will now be added to the list?

Kindleberger didn’t merely make a list. Instead he described the anatomy of a typical crisis in considerable detail: the origin of speculative manias; the accompanying monetary expansion that fuels the flames; the emergence of swindles; the critical stage of “distress,” in which fond hopes suddenly give way to gloom; the means by which crises are propagated, domestic and international; the inevitable argument between those who prefer letting it burn out vs. others who stress the role of the lender of last resort in preserving the stability of the system.

The real excitement for Kindleberger entered with the third edition, after a friend recommended Homer Hoyt’s long-neglected study of One Hundred Years of Land Values in Chicago, five cycles of real estate boom and bust. Land prices climb with share prices during a boom, Hoyt showed, but they sometimes continue to rise and then take much longer to fall after a crash, because real estate speculators inevitably think they can wait for a recovery which then doesn’t come. Commercial real estate in the US, fueled by a binge of lending by savings and loan associations, was a special casualty after the stock market crash of October 19, 1987 – but only with a three-year delay. The Japanese stock market crash in 1990 produced a downturn in Japanese real estate values that lasted the rest of the decade.

It has not been easy for technical economists to come to grips with the propensity to crisis in the world economy. They have been more accustomed to dealing with problems of inflation, unemployment and the business cycle. When Martin Feldstein convened a conference in 1989 to discuss the reaction of regulators, policy makers, investment managers and economists to Kindleberger’s book, later published as The Risk of Economic Crisis, he said as much. The centerpiece of that volume was an essay, prescient in many ways, by Lawrence Summers on the vulnerability of the economy itself to panic in the financial sphere. Innovation had made bubbles more likely than in the past, Summers said; automatic stabilizers such as unemployment insurance, and various federal tax and spending programs made them less likely to spread to the real economy. Still, some institutions had become too large to fail, and whatever the risks might be of encouraging reckless behavior, the costs of bailing them out were small compared to benefit of protecting the real economy from a long and deep recession. These are precisely the issues with which a multinational cast of central bankers, treasury officials and policy advisers led by Summers himself are wrestling this weekend in Jackson Hole, and it is no small irony that Summers himself was not only present at the creation of the most recent wave of bubbles (as a member of the so-called “Committee to Save the World” while serving the Clinton Treasury Department) and among the most prominent victims of its collapse (as a former president of Harvard University).

Is it fair, then, to say that the present crisis was seen coming a dozen years ago by a man who died in 2003? Kindleberger was no Nostradamus. He had nothing to say about the timing of the next crisis, or about how political leaders and their lieutenants would respond to it when it arrived. But he most certainly did lay out a warning that a credit crunch was on its way. And while it is true that several prominent economists saw pieces of the looming panic and crash, none but Kindleberger spelled out with such clarity the overall pattern it would take, especially the emphasis on the role of governments as lenders of the last resort. It is no accident that that the Bank for International Settlements, the central bankers’ central bank, in Basel, Switzerland, where Kindleberger once worked, and where his advice remained highly valued, issued repeated warnings that a crisis was in the offing.

(Robert Aliber, a friend who took over the preparation of new editions for Kindleberger, is himself the author of a long-running best-seller, The New International Money Game, and emeritus professor at the Booth Graduate School of Business of the University of Chicago. With the great advantage of a longer historical perspective, he has restated some of the contemporary material since the mid-’70s, showing that recent bubbles have come in waves, that four or five or more countries involved in each, and that the crises that follow when a wave of bubbles implodes set the foundation for the next wave. Most of the countries that have experienced bubbles have experienced capital inflows, he notes. “Charlie would have loved it, since the exchange rate mechanism is an important part of most of the bubbles. The aggressively-priced sixth edition [$34.95!] is due out in January.)

Meanwhile, Ma’am, the economics profession is gradually becoming more confident, despite embarrassments like the recent crisis. Your day dedicating LSE’s New Research Building – the occasion for your question – was well-spent. In time, new high-tech horizon-scanning instruments will be developed, there and in the many other research centers like it around the world, which will be more dependable for gauging conditions in the global economy than the old literary, seat-of-the-pants methods. New findings mean less need to depend on old books, at least among experts. Bagehot, when he wrote Lombard Street, had little more to go on than word-of-mouth among his own City contacts. Kindleberger had to read deeply in the English, German and French literature in order to assemble Manias, Panics, and Crashes. A new study, This Time Is Different: Eight Centuries of Financial Folly, by Carmen Reinhart, of the University of Maryland, and Kenneth Rogoff, of Harvard University, will appear in November, the first truly quantitative study of financial crises, with a special emphasis on sovereign defaults. And, of course, theorists continue to experiment with new models. With luck, the lessons learned will lead to the same sort of calmer times, at least relative to what went on before, as followed Bagehot’s landmark book. Until these are available, however, and well and truly tested, we may hope that there will be two parallel systems of supervision and control: one based on the best analysis that technical economists can devise, the other on the somewhat different tradition of central banking and regulatory authority.

In any event, since it is unlikely that we have seen the last of financial crises altogether. Kindleberger’s book is precisely the horizon-scanning device desired by thoughtful persons, monarchs and commoners alike, so as not to be taken unaware and uncomprehending by the next financial crisis. Therefore, I have taken the liberty of asking Amazon.co.uk to send the present edition of Manias, Panics, and Crashes to Balmoral Castle so that you, at least, need never ask your question again. In this I am your humble and obedient servant.

David Warsh

Comments

[Steve in Gr...:]

I hope someone will point out to the lady that the current collapse was caused almost solely by Alan Greenspan's inflating the USD money supply in response to the dot.com collapse.

No. We can't do that. That might cause us to limit Bernanke's power to create the next one.

Aug 24 12:14 AM

[TinyTim:]

Mr Warsh-
It is a pleasure to read an excellent article by such a renowned journalist and economic historian. Thank you for directing me to Kindlebergers book and the others cited.

Your book on Knowledge and the Wealth of Nations restoked my interest in economics several years ago as I was reviewing the literature on limits to growth and the effect of increasing returns. It was also a valuable insight on economic academia and Romer's career.

My own opinion of economics is that the leading edge of financial engineering is progressing much faster than economic theory. Which is not to say there aren't times when a book like Kindleberger's does a good job of playing catch-up.

This is especially important now while everyone is citing the mantra that "history rhymes." In the meantime, they are carefully selecting the pieces that rhyme the best.

It is interesting that you bring up the BIS and their warnings which were discussed in several SA articles after the der Spiegal piece. In light of your advice to The Queen, what makes you think that she or any of her advisers would listen to any advice but their own, just as the BIS warnings with Greenspan and Bernanke.

Aug 24 02:48 AM

[chap08:]

Let's be honest and tell the Queen that there will always be financial crises and they will always be "shocks", because we will always be human. The latest scanning device will miss the latest twist on the old game, even when it is right in front of you. Human psychology means that those at the top are the least likely to face up to the truth.

Aug 24 07:55 AM

[Hazel Hende...:]

As a fellow Brit who enjoyed David Warsh's Knowledge and the Wealth of Nations , I appreciate this article and agree with most of it. However, we must still go further outside the " Economics " box and take a systems and compexity view . For example, economists have still not corrected most of their textbooks to embrace the new "triple bottom line " accounting models , which internalize " externalities" . The new ESG ( environment , social and governance ) performance audits of companies has been shown to be material to asset value .
Similarly, these new accounting methods at the level of the firm , need also to be applied to national accounts ( UNSNAs) i.e. to correct GDP/GNP accordingly , by subtracting the costs still
" externaized" to taxpayers and society , as well as the
" defensive " expenditures ( e.g. to clean up pollution) ---all still counted in national accounts as additional " production".
I co-organized the debate in the European Parliament on
BEYOND GDP in 2007 beyond-gdp.eu
When economists and financial "engineers" blind us to externalities , they set us up for continual crises . These " Black Swans " are of our own making.
My forthcoming monograph with physicist Fritjof Capra ,
" Qualitiative Growth" will be published by the Society of Chartered Accountants of England and Wales and Tomorrow's Company and launched in the House of Lords in November.. I commend this and my own multi-disciplinary ,systems approach to measuring national trends with the Calvert Group of socially responsible mutual funds, the Calver-Henderson Quality of Life Indicators( updated at Calvert-Henderson.com ) to David Warsh's attention, as well as the faculty of LSE and Her Majesty.

Aug 24 09:44 AM

[Leftfield:]

So, this panel of luminaries reported to the Queen that a "horizon scanning capability" should be devised. I would like a levitation capability to be devised. These experts should do better than that, what else is new?
I may order Kindleberger. Did you ask Amazon to send a copy to the Queen or did you pay for it?
Also, according to Taleb in "Black Swans," it is no surprise that economists have trouble coming to grips with crises rather than their more typical technical arcana and I am surprised you say the, um, profession, is becoming more confident. I can't see the justification.
Enjoyed the article, thanks.

Aug 24 09:55 AM

[OnW:]

Somewhat pedantic, with tongue in cheek, but an enjoyable and informative read.

Aug 24 09:57 AM

[Jimbo:]

I have read past quotations from Summers and Romer elsewhere. Comparing these with what they are saying now, it appears they have been drinking spiked Obama Kool Aid.

Aug 24 10:05 AM

[Did U Think...:]

Man what a long winded way of saying"Madam Queen, the whole economy of the world is a credit driven Ponzi scheme and you, my lady, are right at the epicenter of it. You know full well why it happened: that scam called fractional reserve banking. You know exactly how and why it happened because it was your henchmen that did it! Fractional reserve banking is specialty of your county which pressed it upon the US back in the early 1900s. you and your blood lines have been using this scam for generations."

"I believe that banking institutions are more dangerous to our liberties than standing armies . . . If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] . . . will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered . . . The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."

—Thomas Jefferson, The debate over the recharter of The Bank Bill, (1809)

WAKE UP AMERICA! Stop making it so complicated. It's a fvcking SCAM, always has been, always will be until we return to honest money and do away with fictional reserve banking.

Aug 24 10:10 AM

[mbkelly75:]

Well written - both the article and most of the comments - thank you for the links. I will use them to update my library.

Aug 24 10:33 AM

[johnbee:]

If we had all stuck to barter the people of this world would be relatively equal and would have advanced to a far lesser degree but the invention of money, and the money lending that followed down the ages, created the ability to take leveraged risks which benefited some and left others broke in the ever increasing seesaw of money supply. At times though, as in war only, there is massive des-truction in which real assets are really lost and need be replaced. Surviving people need work to eat and offered the chance to borrow money again can rebuild faster. Given the greedy neurosis of humans to improve their lives over a limited life span money feeds risk once more and the competitive urge. This is a constant -over successive generations - but with the greater the creation of money and savings from increasingly educated populations comes the greater need to put it somewhere and the creation of risk capital to feed this need, so creating larger and faster opportunities of which some are bubbles and some not. Many make money travelling in these bubbles rather than arriving and so fuel the flames regardless of the concept. The Banks simply take their interest and commissions either way since they have always had recourse against the borrower in law. But careless lending gives rise to careless investing and bigger bubbles and one need remember that a major silent arm of banking business is that of repossession. I would suggest that no banks should have recourse against a bad loan other than the collateral pledged, or even that borrowers should have recourse against an ill considered loan by a bank so they may behave less irresponsibly. But then who would judge? Right now the only real question is how much money has been destroyed for real? In the dot com crash not much was lost- it simply changed hands- from investors to staff and suppliers. Where is it this time? Residential buildings which are allegedly the prime cause of this crash are not destroyed; they are simply re-designated at lower values and borrowers have been pushed into negative equity so decreasing purchasing power. Investors who buy the houses will benefit in time. While banks, needing to protect the asset cover for their loans, have decreased lending to businesses and revalued their collateral downwards as an accounting measure. Government relaxation of accounting rules and printed money will feed money into their economies now until they recover and inflation will readjust the values upwards and allow for lending again, and so the boom bust cycles will repeat themselves for ever until the world ends or a new Jesus defeats the moneylenders, but as Shakespeare knew they have had their pound of flesh. Nothing changes in human nature- that is the only economic lesson to be learned.

Aug 24 11:23 AM

[Dukk:]

The Austrians saw this coming.

Aug 24 11:44 AM

[TeresaE:]

Economists, scientists and engineers are incapable of seeing the big picture. So are most doctors, lawyers and accountants.

A common trait for success in those fields is the ability to micromanage and specialize in tiny bits of the puzzle.

Really, no world leader or politician should be clueless to the mess they have helped to create. I think most know in their hearts, they just refuse to accept their own complicity in the ongoing nightmare. And they all suffer from the "smarter than" syndrome where they are sure their policies will work because they are just smarter than us dumb serfs.

Europe and the US, persuaded by the elite, decided that more than 50% of their economy was not needed. The rulers entered into deals with the biggest taxpayers (happen to be the biggest companies) to help these taxpayers secure cheap labor and run their (smaller) competitors out of business, or to the point of buying them on the cheap.

The joke on our rulers, the mega-nationals and the experts is staring them in the face and they can't see it.

That 50% working class, were the governments' and big companies' best customers. And they fired them.

They colluded to take our wealth. What they didn't realize was that we, the small business and its workers, were your best customers and taxpayers. You crushed us with foreign competition (cheap labor & few regulations) and protectionist (environment, worker, non-worker) regulations and never ending taxes and fees, fines and punishments.

Tell me, are your new, cheap, Asian suppliers so quick to buy what you are selling? Can most even afford to?

Fix that underlying reality, or continue to see these disasters descend upon us.

Aug 24 12:49 PM

[AuGod!:]

There are moments here at SA when a person speaks his/her mind about the state of things on the ground, not with bland factoids and stats but also with personal conviction and power. I think that commenter TeresaE is angry and quite right in the general direction of her repugnance, indignation and disgust. As for specifics, as if anyone needs myriad credible examples, well she has plenty of those also. It is my hope that things turn around positively for her and those for whom she articulates the failures and destructiveness of various policies. I also sense that she and les autres will find an enterprising way to direct their inner fire for themselves, us all and the general good. To readers, agree with her or not, it is from such people that the U.S. must look to for inspiration and sparks of light, in spite of the darkness fast approaching. To TeresaE, "DON'T give up the fight".

" TeresaE: Comments (554) Follow

Economists, scientists and engineers are incapable of seeing the big picture. So are most doctors, lawyers and accountants.

A common trait for success in those fields is the ability to micromanage and specialize in tiny bits of the puzzle.

Really, no world leader or politician should be clueless to the mess they have helped to create. I think most know in their hearts, they just refuse to accept their own complicity in the ongoing nightmare. And they all suffer from the "smarter than" syndrome where they are sure their policies will work because they are just smarter than us dumb serfs.

Europe and the US, persuaded by the elite, decided that more than 50% of their economy was not needed. The rulers entered into deals with the biggest taxpayers (happen to be the biggest companies) to help these taxpayers secure cheap labor and run their (smaller) competitors out of business, or to the point of buying them on the cheap.

The joke on our rulers, the mega-nationals and the experts is staring them in the face and they can't see it.

That 50% working class, were the governments' and big companies' best customers. And they fired them.

They colluded to take our wealth. What they didn't realize was that we, the small business and its workers, were your best customers and taxpayers. You crushed us with foreign competition (cheap labor & few regulations) and protectionist (environment, worker, non-worker) regulations and never ending taxes and fees, fines and punishments.

Tell me, are your new, cheap, Asian suppliers so quick to buy what you are selling? Can most even afford to?

Fix that underlying reality, or continue to see these disasters descend upon us. "

Aug 24 01:42 PM

[Boxed Merlot:]

On Aug 24 09:44 AM Hazel Henderson wrote:

> When economists and financial "engineers" blind us to externalities
> , they set us up for continual crises . These " Black Swans " are
> of our own making.

----------------------...

“ ... Much has been written about panics and manias; much more than with the most outstretched intellect we are able to follow or conceive; but one thing is certain, that at particular times a great deal of stupid people have a great deal of stupid money….”

----------------------...

The Calvert-Henderson Quality of Life Indicators grew out of a relationship between an international futurist, Hazel Henderson, an asset management firm, Calvert, and 12 scholars with expertise in the respective dimensions of quality of life explored on this website.
Calvert of Bethesda, Maryland co-sponsored the effort and assumed leadership of the project's research and development in 1994. Calvert is a leader in the field of socially responsible investing (SRI), with over $15 billion in total assets and 40 SRI and fixed income funds. Calvert's approach to SRI includes incorporating social analysis into its investment process, actively encouraging companies to adopt best practices, and investing in disadvantaged communities. Barbara Krumsiek, the CEO of Calvert, has this to say about the Calvert-Henderson Quality of Life Indicators:
"All over the country, citizens are demonstrating a desire to engage in serious discussions about how to measure quality of life and livable communities in the United States. For the past eight years, Calvert has been a part of this exciting debate, first with the release of the initial volume of the Calvert-Henderson Quality of Life Indicators, and then with the release of this web site - an updated version of the first national comprehensive assessment of the quality of life in the United States using a systems approach. The deep insights, illuminating findings, and bold explorations into historical and contemporary environmental, economic, and social conditions of the country are our contributions to this important debate. We hope its messages and many lessons will empower people from all walks of like who are equally concerned about our future together on this planet."
The effort was initiated and co-sponsored by Hazel Henderson, whose original conceptualization of a systems approach to measuring quality of life guided the development of the indicators. The project is the fulfillment of 25 years of research and advocacy worldwide for more comprehensive statistics beyond the traditional macroeconomic indicators based on the United Nations System of National Accounts.

Throughout the development of the Calvert-Henderson Indicators, the research effort was directed by Jon Lickerman, then Director of Calvert's Social Investment Research Department, working in close collaboration with Hazel Henderson. He is now a consultant in the fields of socially responsible investing and corporate social responsibility and a member of the Advisory Board for the Calvert-Henderson Quality of Life Indicators. Jon is also a glass artist, specializing in fused and glassblown work.
(What’s Jon use for fuel to heat his glass with, certainly hope it’s nothing with a carbon footprint)

Patrick A. Simmons
Calvert-Henderson Shelter Expert
Patrick Simmons is Director of Housing Demography at the Fannie Mae Foundation. Prior to joining the Fannie Mae Foundation, he held several positions in the Office of Housing Research at the Fannie Mae corporation, including Manager of Housing Policy Research.
Mr. Simmons is currently managing a multiyear research program on the efforts of the housing finance industry to expand homeownership opportunities for historically undeserved populations. He is also editor of a statistical compendium titled Housing Statistics of the United States, and is Associate Editor of the Foundation's two research journals, Housing Policy Debate and Journal of Housing Research. While at the Fannie Mae corporation, Mr. Simmons managed research projects in the areas of housing and mortgage market discrimination, homelessness, and urban housing policy.
----------------------...
Pretty interesting organization you have here. I don’t suppose any of your previously well placed colleagues could / would claim to have had any influence on public policy that’s led to Fannie’s problems or leading us further to the debacle known as cap and trade. The latter’s shaping up to be an equivalent commodity that would make the Indian’s swap of beads for Manhattan look like a stroke of financial genius. At least beads had physicality. I learned a long time ago that more wealth is created on a Monday night in a local board of Supervisor’s meeting when land use zoning and rezoning permits are issued than could be earned in several lifetimes, but this international emissions permitting credits etc., takes the straw to gold story to new heights.
Thanks.

Aug 24 01:56 PM

[MSimon:]

It all starts with "expected future value" or "expected future profits".

And it doesn't require a central bank pumping the money supply. A high rate of profit that releases sufficient capital will suffice. We have had a 30 year run of that with microprocessor/electro... technology.

So where did we go wrong? Not enough investment in research. i.e. not enough good new ideas to absorb the generated capital. Compared to the losses we are currently sustaining research is very cheap. The difficulty is that it requires a LOT of brainpower. And there is never enough to go around. And way too much is going into banking and marketing (it is where the money is) and not enough into sciences and engineering.

In other words - we don't apply the right valuation to our overall situation. Hence - financial bubbles vs technological bubbles. Financial bubbles are looting. Technological bubbles are foundations for the future (the dot com bust left us with infrastructure - which when marked to market led to the communications boom).

Aug 24 02:57 PM

[MSimon:]

This got truncated:

We have had a 30 year run of that with microprocessor / electronics technology.

Aug 24 03:00 PM

[MSimon:]

Let me add:

Why didn't marking to market all the fiber installed in the dot com boom lead to a general collapse? It was still producing a cash flow. And when marked to market it was capable of generating profits. One other advantage was that the technology was still coming down the learning curve. Thus when demand met supply it could be covered at a market clearing price even though that price was much lower than it was at the peak of the boom.

OTOH the overbuilding of houses is not doing the same thing because the new houses are not consuming significantly fewer resources than the previous generation. They provide no real economic advantage.

My prescription? Get a few more scientists and engineers on the banking committees. I can easily train an engineer to read a balance sheet. Training a banker to understand science and technology is more difficult.

Aug 24 03:56 PM

[ngwun:]

"They" knew it was coming, but in anticipation of orgasm, could not get their hand off it.

The dream is not the real: it is far more potent.

Aug 24 06:36 PM