Umair Haque / Bubblegeneration
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Tuesday, March 30, 2010

Chicken or Egg? DNA.


There's an interesting discussion taking place about the causes of the crisis - and crises in general. Was it a global savings glut that caused an asset bubble - or did an asset bubble invoke the need for more financing, inducing larger savings? 

It may sound arcane, but it has tremendous implication for policy and strategy. If asset bubbles lead to savings gluts (rather than vice versa), then monitoring and puncturing them at the macroprudential level takes precedence over interest rate manipulation and inflation targeting. 

For companies, there's an even more interesting implication. Evil, lame 20th century corporations depend critically on global consumption rates staying sky-high in at least some parts of the globe - financed by excess savings in others. So this research suggests that strategy 2.0 begins by not fuelling asset bubbles, but puncturing them gently - so imbalances never spiral out of control.

Yet, I think the question of root causes hasn't been fully addressed yet.

Which came first - the chicken, or the egg? The DNA. That's my take on the above debate. The real root cause of crises and collapses are in the institutional DNA. When institutions are hollowed and emptied, a crash, a collapse - or a series of them - is the inevitable result. Amrica's asset bubbles and China's savings gluts are manifestations of a deeper bankruptcy - institutional bankruptcy, that renders both economies unable to allocate capital productively in the first place.

-- umair // 10:14 PM // 4 comments


Comments:

if you want to know what causes the vast majority of bubbles, look into austrian business cycle theory.
// Anonymous kid mercury // 2:31 AM
 

no chicken. no egg. no dna. the root cause is much more fundamental.

the cause is a government that places the interests of select groups (ex. finance industry) ahead of the majority of constituents. certain corporate interests are so embedded in policy that its actors are able to extract disproportionally from the rest; privatize gains, socialize losses. unless this is fundamentally changed all the economics are meaningless.

when a minority have more influence on governments than the majority, representative democracy is not fulfilled. apathy is followed by anger.

i don't see this as a historical anomaly, its been happening (even more severely) since the dawn of time. the difference now is the spread of more diverse and open information via the internet and then beyond...as opposed to being restricted via illiteracy, monarchy, religious institutions, centralized media, etc.

we are nearing another historical inflection point.
// Blogger marko // 4:45 AM
 

Austrian business cycle theory as mentioned by the first poster, explains the bubble formation and subsequent crisis, far better then theories put forward by either Freedman or Keynes.

However the second posters concerns about the financial industry capturing the US government are relevant as they helped the crisis form. None the less we would have had a crisis even without the connivance of an unaccountable financial industry. The institutional theft just made the trouble worse this time.

The precursors of this crisis have been brewing since 1913 when the Federal reserve was established in the first place. Only then was it possible for government and banks to legally do things through the Federal reserve system that are illegal for individuals to do on their own. As a general rule its undesirable for governments or large corporations to have abilities that individuals may not have under the law.

Its illegal for individuals to turn out counterfeit money but government does this all the time. So too its illegal for individuals to engage in price fixing, but governments and the larger corporations do this all the time. Individuals may not incur debts that are never repaid without loosing their ability to contract future credit but governments do this all the time.

Take away all this government/ corporate impunity and future economic crisis right themselves rather quickly. Bubbles before 1913 did not have the sort of wide ranging impacts they have today.
// Blogger Gordon Angelino // 6:46 AM
 

Austrian business cycle theory as mentioned by the first poster, explains the bubble formation and subsequent crisis, far better then theories put forward by either Freedman or Keynes.

However the second posters concerns about the financial industry capturing the US government are relevant as they helped the crisis form. None the less we would have had a crisis even without the connivance of an unaccountable financial industry. The institutional theft just made the trouble worse this time.

The precursors of this crisis have been brewing since 1913 when the Federal reserve was established in the first place. Only then was it possible for government and banks to legally do things through the Federal reserve system that are illegal for individuals to do on their own. As a general rule its undesirable for governments or large corporations to have abilities that individuals may not have under the law.

Its illegal for individuals to turn out counterfeit money but government does this all the time. So too its illegal for individuals to engage in price fixing, but governments and the larger corporations do this all the time. Individuals may not incur debts that are never repaid without loosing their ability to contract future credit but governments do this all the time.

Take away all this government/ corporate impunity and future economic crisis right themselves rather quickly. Bubbles before 1913 did not have the sort of wide ranging impacts they have today.
// Blogger Gordon Angelino // 7:54 AM
 
 

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