Tuesday, 3 February 2009

Why do we keep doing this to ourselves?

I loved the following comment from someone calling themselves "Bjorn Borg". In a recent ftalphaville blog post, he complained:

I'm fed up with all this 'following the Swedish bank/nationalisation/re-privatisation model' stuff. Ok so the Swedish banks went skint 10 years ago....they were bailed out...everything worked for a few years.

Now they're going skint again....in double quick time. It hardly sets a worthy precedent for the rest of the world to follow.

There is an uncomfortable truth in this observation. We appear to be locked in a cycle of bubble and bust with each round of the cycle proving to be more damaging than the last one. Mr. Borg has picked up the trend in Sweden, but it is world wide phenomena.

Take, for example, the US. Back in the early 1980s, US banks were almost destroyed by excessive lending to third world economies. Ten years later, the banking system was again in trouble with the savings and loans crisis. Before the decade was out, the US saw another boom and bust with the dot.com bubble. As soon as that bubble crashed, the housing boom was inflating, leading directly to the sorry mess we are in today.

The UK is no better. Since the early 1970s, we have suffered four cycles of housing boom and bust; the 1973 Barber boom, the somewhat less well known Callaghan housing bubble of 1977; the Lawson boom that crashed in 1989 and today's housing mess. Added to this list, we had our very own dot.com bubble; not to mention a couple of exchange rate crises.

Unfortunately, we seem to be addicted to particular kind of abuse. It is unlikely that this crisis will teach us much. It is a fair bet that as soon as this crisis is over, there will be another asset bubble waiting to pounce on us and lead us astray.

Changing the subject slightly - is everyone enjoying the snow?


Mark Wadsworth said...

Why? You know why. It's the myth that rising house prices are good for you.

cambstreasurer said...

If you recall, the plot of Walter Scott's Rob Roy involves a market crash centred around speculation on oak woods.

Anonymous said...

Yes, but it is the fiat money system that causes it. Look at M3 from 1997 to the present, and you see government printing between 12% to 14% more paper notes a year. This new money was spent on quangos, it found its way from there into house prices.
The government wins all round, you pay more stamp duty, more council tax and inheritance tax.
The last bubble to pop will be state spending.

AntiCitizenOne said...

M3 is credit, not money.

AC said...

The soviet union did away with the business cycle, do we really want to go there ?

The problem is big government and fiat money.

The lesson we need to learn is government is very limited in what it can do.

It can't end boom bust, it can't create wealth, it can't improve society etc etc. All it can do is print money, take money from people and give money to people.

When there is a bust the best thing it can do is speed the liquidation of bad assets and mal-investments.
Anything else it does e.g. prop up car companies and banks just makes things worse and prolongs the pain.

Anonymous said...

Actually the 77 boom wasn't in real terms a boom. It was the inflationist policies pursed after the 73 credit crunch. Inflation was as high as 25% in the UK therefore all real assets rose in value, however in real terms it was a loss. We may see this again over the next few years here, as inflation picks up again to astronomical levels.

Boom Bust cycles are built into the current financial system. They have been happening for 1000's of years now. It's fractional reserve banking proped up by central banks and governments (or in the old days all banks would fail in Rome and Greece). Sound Money is whats needed to avoid boom bust, which has been implemented in the past for example the Central Bank of Holland (which is why at the time it became such a financial powerhouse, but utimately it failed as it inflated, like all banking systems tend to).

M3 is credit, but ultimately it is money, as the central banks will no doubt monetarise the debt. We will get huge inflation in the future because of this. The house price and stock market inflation of the past two decades will move into real hard assets, as the governments continue to prop up these dead weight entities. They are also ruining the markets pricing mechanism, which will mean stagflation.

Anonymous said...

spot on anonymous.
I am a different one.

Electro-Kevin said...

Have you ever tried putting up a flat pack from Ikea ? The people who write the instructions seem to think we're telepathic or something.

And I never did get a good night's sleep on that futon.

Total krap.

JPT said...

Well I am.

Anonymous said...

Its a consequence of fiat currency and fractional reserve banking. It turbo charges the economy, allowing more rapid wealth creation than would otherwise occur. But, like a tubo charged car engine, the extra performance comes at a price. A turbo-charged engine is stressed and will blow up eventually, whereas a low stressed 3 cylinder will last forever if you give it basic maintainence. Every now and then the economy blows a gasket and has to be rebuilt. The alternative is a much slower growing economy, with little or no change in living standards over long periods. IE like it used to be.

Anonymous said...

Sobers, I must disagree.

Excessive Monetary exapnsion causes the boom/bust cycle. Markets will grow regardless of if the money supply expands. In fact the system would grow far better if we had sound money.

If your logic is true, then why did the West allocate so much of their resources into overpriced assets such as housing, while China put investments into increasing their productive capacity. It was caused by ultra expansive monetary policy that governments implemented. If we had sound money this would not have occured and we would have directed more of our capital towards productive investment rather than wasteful consumption.

Feel free to read my blog which will explain these details further. I am yet to explain the inevitable boom/bust and how it can be easily avoided. : http://theageofstupidity.blogspot.com/

K T Cat said...

Hey, get with the program! This is all about entertainment value. No one's going to tune in to watch Wells Fargo take in savings accounts and pay 3% and lend the money out for mortgages to people with good credit and 30% down and earn 8%.

We want razzle-dazzle! We want chills and spills and thtills!

Anonymous said...

"We want chills and spills and thtills!" At last; a comment on the snow.

Mark Wadsworth said...

@ Anon 16.51, Sobers.

You understand the 'how' you do not grasp the 'why'.

Successive UK governments have blown house price bubbles to ... er ... win elections. It's always great on the way up, well, for the slim majority who owned a house when the bubble starts. For everybody else it's a huge, real cost, a lifetime of debt.

As to the 'how', the other element is very restrictive planning restrictions, which people convince themselves is 'to protect the green belt'. Like heck it is, it's to prop up house prices.

Anonymous said...

@ anonymous 19:30: you can't compare asset allocation between the UK, a democratic (sort of) free market economy, and China, a one party autocratic dictatorship! Given the chance I'm sure the Chinese would opt for buying their own houses and having plasma TVs and cars on cheap credit. They don't get the option.

Yes, expansion of credit fuels booms, and what allows credit to grow so fast? FRB and a currency that is not backed by anything. All money is now an IOU of some sort, but now with no underlying 'thing' to be owed, just another bit of paper. There are no gold bars to be counted in bank vaults. If there were it might be a bit more obvious which banks were solvent and which were bankrupt.

But without the credit FRB allows we would have to return to creating wealth slowly by actually making stuff and selling it, investing the profits, and expanding ones business that way. Who does that nowadays? No one. They just borrow shed loads from a bank (or rather did) and expand rapidly. If the economy continues to grow they prosper. But when it slows or contacts those who have just taken on large debts, or over extended themselves are screwed. As we now see.

Before FRB there was no economic cycle because there was little debt. You worked, you hopefully made enough to survive, and if you were lucky you saved a bit for your old age. Life was harsh and brutal. It may go back to that now. There is nothing that says humans always progress upwards.

Electro-Kevin said...

I have to say, I find it very difficult to envisage where the next UK 'bubble' is going to come from.

We may well have broken the cycle - well, at least for a very long time anyway.

Electro-Kevin said...

An no. I'm not enjoying the snow. It tastes a bit acidic this year.

Anonymous said...

Bubbles are organised ways to fleece the sheep for their wealth and enrich the wealthy. The global housing bubble was organised as a way to turn mortgages into an ATM for banks and hedge funds, who then took that money, and malinvested for a hefty fee. Clever, eh?! The next bubble will be the Great Green Bubble: the Al Gorian Scam of Almighty Proportions.

Anonymous said...

@sobers "But without the credit FRB allows we would have to return to creating wealth slowly by actually making stuff and selling it, investing the profits, and expanding ones business that way."

It doesn't matter what the money supply is. If there is less money then prices are lower. You still have loans but the loans are based on real savings, not artificial savings created from FRB.

The reason for growth is not economic cycles, its the industrial revolution - its our free energy in fossil fuels. Britain had a sound free market money at the start of the industrial revolution and grow to overtake France as the World Power.

We have become accustomed to thinking money and credit are wealth. I'm afraid its the goods we all produce, not money.

Anonymous said...

AC said...

The soviet union did away with the business cycle, do we really want to go there

Get with the program: There really is no such thing as "the business cycle" just permanent growth of government!

The USSR was just being honest about the stealing - they had the power so they just pillaged outright.

In the west we have the government bloating itself on the upswing with all the new taxes rolling in and then bloating itself some more on the downswing "to help growth".

But the end "here" will be the same as in the USSR: Society collapses under the weight of the useless flab and rampant corruption!

Except, the westerners will not like the move down in living standards one bit while the Russians hardly noticed!