Bubble-nomics
BUBBLE-NOMICS....As a lesson in the perils of blogging while ignorant, I see that the "all bubbles are credit bubbles" stuff I was burbling ineptly about the other day turns out (of course) to be an old story. Nouriel Roubini explains the Minsky Credit Cycle:
Hyman Minsky was an American economist who died in 1996. His main contribution to economics was a model of asset bubbles driven by credit cycles. In his view periods of economic and financial stability lead to a lowering of investors' risk aversion and a process of releveraging. Investors start to borrow excessively and push up asset prices excessively high. In this process of releveraging there are three types of investors/borrowers. First, sound or "hedge borrowers"....Second, "speculative borrowers"....Finally, there are "Ponzi borrowers"....Yeah, that's what I was trying to say. Really.The other important aspect of the Minsky Credit Cycle model is the loosening of credit standards both among supervisors and regulators and among the financial institutions/lenders who, during the credit boom/bubble, find ways to avoid prudential regulations and supervisions.
And while we're on the subject (and because I obviously haven't learned my lesson), here is Brad DeLong on the global imbalances that drove the bubble:
It's not a global savings glut: it's a global investment shortfall.Right. Would someone like to address this in a little more detail? Clearly there's been a huge amount of money sloshing around the system in recent years, and just as clearly it ended up financing a housing bubble because corporations and entrepreneurs around the world couldn't dream up enough productive ways to use up all that money instead — despite low interest rates and (in the U.S. anyway) reduced capital gains tax rates. This is a bad thing, no? Even with money practically free and after-tax returns high, there apparantly weren't enough attractive investment opportunities to mop up all that dough. Why?