gpadave's Comments RSS Syndication from SeekingAlpha.com http://seekingalpha.comuser/169010/comments http://seekingalpha.com/article/105626-defining-a-depression?source=feed#comment-305506 305506

On Nov 12 01:21 PM mathgeek2 wrote:

> Interesting analysis, but I have to take issue with some of the specifics.
>
>
> Your first quote references new industries as the source of bubbles.
> I don't think this is an essential component. I do strongly agree
> that bubbles are often a credit phenomenon, but I think you miss
> some key aspects of the self-reinforcing mechanisms.
>
> At least in theory, any asset could be subject to a bubble, so long
> as there is some plausible way to belive in a very high future value
> of the asset. New industries have historically fit the bill, but
> so have assets which are belived to be functionally finite. What
> this allows is plausible speculation of very high future values.
> "The amount of land in California is fixed, demand will continue
> to grow, so prices will always go up."
>
> I agree that a loose monetary environment often is a crucial trigger
> for the bubble. It is easy to obtain credit to invest in the bubble
> asset.
>
> But this is where the truly pernicious aspects of an asset bubble
> kick in.
>
> - The price appreciates rapidly. So much so that a wider and wider
> pool of potential investors begins to belive that any inherent economic
> value is irrelevant, and they buy on the simple anticipation of the
> asset rising in value. In other words, people start to buy the asset
> for no reason other than the expectation it will continue to go up
> in value. This drives the price up, which reinforces their viewpoint.
>
>
> - Crucially, the asset also absorbs liquidity. An actively investable
> asset that is rising rapidly can readily absorb liquidity. What this
> literally means is that, as money supply expands, that excess money
> is sunk into purchases of the bubble asset. From the point of view
> of the central bank, all is well, because the economy is humming
> along, but yet there is not execessive inflation in the economy at
> large... all of the "inflation" is taking place in the bubble asset.
>
>
> - Finally, the growth of the asset bubble reduces apparent risk.
> Loans made using the bubble asset for collateral are rarely or never
> incurr losses. Institutions or persons under financial stress can
> readily paper over their challenges either by selling any of the
> bubble asset they hold or by borrowing against it. This reduction
> in apparent risk leads to further increases in leverage.
>
> This is an asset bubble, and we have yet to develop a method for
> dealing with them effectively in our economy. Nonetheless, this is
> an old problem.
>
> Eventually of course, often triggered by an exogenous shock or a
> decrease in available credit / money supply / liquidity, there are
> no more buyers to sustain the ponzi scheme of ever-increasing prices,
> and the asset value goes into free-fall. This leads to removal of
> credit, demand for (non-bubble!) collatoral, and eventually forced
> liquidation, driving prices down further.
>
> Depending on the amount of leverage involved, the net effect can
> be a severe contraction of the money supply, deflation, and a credit
> freeze. The intensity of the housing bubble collapse compared to
> the internet bubble is a direct correlate to the size of the asset
> and the degree of leverage employed.
>
> Depending on what specific actions David Merkel is referring to,
> it can be argued that Herber Hoover certainly and FDR probably made
> the Depression much worse.
>
> Specifically, allowing runs on banks is disasterous. Cutting government
> spending and raising taxes (as Hoover did, and FDR did in 34-35)
> is a huge mistake. And of course onerous trade restrictions made
> things much worse.
>
> If, on the other hand Merkel is suggesting, as Herbert Hoover's economic
> advisors did, that the answer is "liquidate, liquidate, liquidate"
> then I must beg to differ. While that is part of the answer, government
> actions to counteract the contraction of credit and the money supply,
> and in extreme cases, directly support aggregate demand, are the
> appropriate responses to the threat of a major deflation-led depression
> in the wake of a major bubble.
>
>
>
>
> ]]> Thu, 13 Nov 2008 16:12:51 -0500

On Nov 12 01:21 PM mathgeek2 wrote:

> Interesting analysis, but I have to take issue with some of the specifics.
>
>
> Your first quote references new industries as the source of bubbles.
> I don't think this is an essential component. I do strongly agree
> that bubbles are often a credit phenomenon, but I think you miss
> some key aspects of the self-reinforcing mechanisms.
>
> At least in theory, any asset could be subject to a bubble, so long
> as there is some plausible way to belive in a very high future value
> of the asset. New industries have historically fit the bill, but
> so have assets which are belived to be functionally finite. What
> this allows is plausible speculation of very high future values.
> "The amount of land in California is fixed, demand will continue
> to grow, so prices will always go up."
>
> I agree that a loose monetary environment often is a crucial trigger
> for the bubble. It is easy to obtain credit to invest in the bubble
> asset.
>
> But this is where the truly pernicious aspects of an asset bubble
> kick in.
>
> - The price appreciates rapidly. So much so that a wider and wider
> pool of potential investors begins to belive that any inherent economic
> value is irrelevant, and they buy on the simple anticipation of the
> asset rising in value. In other words, people start to buy the asset
> for no reason other than the expectation it will continue to go up
> in value. This drives the price up, which reinforces their viewpoint.
>
>
> - Crucially, the asset also absorbs liquidity. An actively investable
> asset that is rising rapidly can readily absorb liquidity. What this
> literally means is that, as money supply expands, that excess money
> is sunk into purchases of the bubble asset. From the point of view
> of the central bank, all is well, because the economy is humming
> along, but yet there is not execessive inflation in the economy at
> large... all of the "inflation" is taking place in the bubble asset.
>
>
> - Finally, the growth of the asset bubble reduces apparent risk.
> Loans made using the bubble asset for collateral are rarely or never
> incurr losses. Institutions or persons under financial stress can
> readily paper over their challenges either by selling any of the
> bubble asset they hold or by borrowing against it. This reduction
> in apparent risk leads to further increases in leverage.
>
> This is an asset bubble, and we have yet to develop a method for
> dealing with them effectively in our economy. Nonetheless, this is
> an old problem.
>
> Eventually of course, often triggered by an exogenous shock or a
> decrease in available credit / money supply / liquidity, there are
> no more buyers to sustain the ponzi scheme of ever-increasing prices,
> and the asset value goes into free-fall. This leads to removal of
> credit, demand for (non-bubble!) collatoral, and eventually forced
> liquidation, driving prices down further.
>
> Depending on the amount of leverage involved, the net effect can
> be a severe contraction of the money supply, deflation, and a credit
> freeze. The intensity of the housing bubble collapse compared to
> the internet bubble is a direct correlate to the size of the asset
> and the degree of leverage employed.
>
> Depending on what specific actions David Merkel is referring to,
> it can be argued that Herber Hoover certainly and FDR probably made
> the Depression much worse.
>
> Specifically, allowing runs on banks is disasterous. Cutting government
> spending and raising taxes (as Hoover did, and FDR did in 34-35)
> is a huge mistake. And of course onerous trade restrictions made
> things much worse.
>
> If, on the other hand Merkel is suggesting, as Herbert Hoover's economic
> advisors did, that the answer is "liquidate, liquidate, liquidate"
> then I must beg to differ. While that is part of the answer, government
> actions to counteract the contraction of credit and the money supply,
> and in extreme cases, directly support aggregate demand, are the
> appropriate responses to the threat of a major deflation-led depression
> in the wake of a major bubble.
>
>
>
>
> ]]> http://seekingalpha.com/article/95125-who-s-going-to-bailout-the-u-s-government?source=feed#comment-252787 252787 Fri, 12 Sep 2008 12:03:42 -0400 http://seekingalpha.com/article/95125-who-s-going-to-bailout-the-u-s-government?source=feed#comment-252780 252780 Fri, 12 Sep 2008 11:57:50 -0400 http://seekingalpha.com/article/84734-gld-tonnes-in-the-trust-increases-by-46-tonnes?source=feed#comment-205259 205259 Mon, 14 Jul 2008 12:41:50 -0400 http://seekingalpha.com/article/84734-gld-tonnes-in-the-trust-increases-by-46-tonnes?source=feed#comment-205248 205248 Mon, 14 Jul 2008 12:32:06 -0400 http://seekingalpha.com/article/84735-lawrence-roulston-gold-prices-will-trend-higher?source=feed#comment-204560 204560 Sun, 13 Jul 2008 16:16:01 -0400 http://seekingalpha.com/article/76187-penn-west-energy-trust-an-underappreciated-gem?source=feed#comment-166592 166592 Mon, 12 May 2008 22:51:35 -0400 http://seekingalpha.com/article/73560-penn-west-energy-needs-to-show-investors-its-worth?source=feed#comment-155330 155330 Wed, 23 Apr 2008 11:59:04 -0400 http://seekingalpha.com/article/70372-what-s-yahoo-worth-to-microsoft-without-alibaba?source=feed#comment-133408 133408 Sat, 29 Mar 2008 11:55:50 -0400 http://seekingalpha.com/article/67335-usec-inc-q4-2007-earnings-call-transcript?source=feed#comment-133059 133059 And to make matters worse I'm long. ]]> Fri, 28 Mar 2008 12:53:11 -0400 And to make matters worse I'm long. ]]>