I will leave it to the Reader to ask how definitive behaviourial economics can be, urging you to read this Post by Tim Harford. I would take a slightly different tack, and ask to what degree are bubbles engineered by some segment of the economy. Wall Street’s thirst for IPOs was an obvious culprit in the dotcom bubble, as manipulators realized Profits of 300-400% could be realized in the short term with a highly successful IPO offering. Vast amounts of excess Stock was sold at highly-touted, market-competitive, high-pressure Phone Sales. Prices–from Stock price through Product price–became artificially ramped up; Investor and Consumer expected to pay for it all. Investment Bank management, in Today’s crisis, wrote bad paper at Record rates, simply to ramp up their Profits Share programs. One can identify an economic segment who was the prime generator behind the S&L Bailout of the 1980s. It is also known that bubbles are characterized by excess massive flows of Cash to some institutional entities as bubble engineers could not just grab the Dollars, but had to designate some lucky industry as the Winner of the Lottery. The S&L bubble of the 1980s brought Us a superabundance of Strip Malls and Commercial Office Space, the Dotcom bubble brought Us vastly over-capitalized Investment programs in Tech areas which could never be self-supporting, and the financial crisis brought Us a house for every SUV. One must finally consider the position of Government and Fed, who of late has decided to support all bubbles, based upon the belief that what is good for Special Interests is good for the Country.
The next bubble resides here, or in health care. I would suggest that Cap-n-Trade of Carbon will be the next bubble slush fund. Carbon limits has greater bubble potential than does Health Care, which has already exploited most of the high-Cost bubble elements such as artificial Pricing, and over-rich capitalization. Health Care is also limited in scope to a few industry segments, while Carbon Trading can flow across the entire economy. The Sharks will find much more exploitable material in the Carbon Trade, and could not even be forestalled by an outright Carbon tax based upon on Pigou principles. I await an final Outcome, knowing that it will take years for the Dust Cloud to settle, and will take decades more to get elemental Change in any Windfall designed.
Here is another simple flow example of a bubble. Consumers themselves are closing down Credit Card accounts at a tremendous rate, realizing that a simple 6-month delay in Consumer Spending can save a 20% Credit charge against the Purchases. Here is the incipient conditions necessary for a bubble, and the number of Account closings suggests there was a real bubble in the Consumer Credit extension. Convincing people that they needed a higher level of available Consumption Credit seems like a good method to generate artificial financial charges of simple existence, and easy expansion of the Credit lines helps generate the delayed payments which was the main source of revenue for Credit Card companies. Here again are the Conditions for a bubble. lgl
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