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?