Thursday, 7 May 2009

Bubble Mania

There is one bunch of people who are written out of the media narrative when it comes to the Great Credit Crunch of 2008, and that's the Austrian school of economics.

Why? admitting that economics is not a science undermines a lot of the academics and the medias preconceived perceptions and opinions, and undermines the political will of the authorities. Will to Power.

I hold to the view that the crunch can only be understood properly by understanding the economic problem behind it, and that problem at heart is money creation.

Via Samizdata, ASI


Mark Wadsworth said...

Nah, it's simpler than that, it's asset price bubbles (primarily land price bubbles, but the Great Depression was a share price bubble) coupled with credit bubbles.

The credit bubble is the flipside of the land price bubbles, you can't have one without t'other.

Sean said...

Not saying that is not so, but if the money was not created in the first place, which we do through credit in the fiat currency system than the assets could not have risen, which is what the Austrian School is saying, hard currency less bubbles?

Assets are assets at the end of the day? just as in the Great Depression, creating too much money through lending silly money distorts real values?

Mark Wadsworth said...

AFAIAC, 'money' is but a small sub-category of 'credit'.

'Credit' is easier to understand, and is all well and good if the borrower can repay and if the vendor can sell more goods and services by offering credit terms (real life example, you borrow money to buy a van and go into business as a delivery driver, van maker happy, you are happy, your customers are happy) and the income the borrower generates from that asset is more than enough to cover capital and repayments on the loan.

Where it goes wrong is when people borrow money in order to buy something that generates little income but is expected to generate capital gains (especially land and property, but like I said it can be other things).

So lending to productive businesses is A Good Thing, all in all, but lending to speculate on assets that do not increase the wealth of the economy (house prices are a zero sum game and ultimately a giant Ponzi scheme - the 'real value' has not increased) is A Bad Thing because the bubbles always burst, which chokes off lending to productive businesses as well.

Sean said...

All well and good Mark, and once again I do not disagree, but what happened was more than land.

the US had its first land bubble in its history as a result of the political will to lend to poor people, we did what we always do buy into land, the European banks handed out plenty to eastern Europe and Spanish sent loads of cash into south and Latin American.

At the end of the day its a buyer and seller argument, if you make stuff that I would like to buy but dont have the cash, who is more shafted me or you? and if you lend me the money to buy and I cant pay it back, and you refuse to liquidate some or part of the debt, then what? war eventually I should imagine?

Productive business only works if people have the confidence to buy, and that's the problem.
supply first must be matched by confidence
,then demand follows.

Fiat currency is at the end of the day a political currency subject to the tides of political whims. Money is Trust, and too much credit destroyed the Trust.

What you describe works, but only when we have sound money and financial order, which we dont have. All we are likely to get is a mini boom with another bust.

If its not land that the excess capital went into, it would surely be something else.

Mark Wadsworth said...

"All we are likely to get is a mini boom with another bust. If its not land that the excess capital went into, it would surely be something else."

Agreed, that's why I pointed out that The Great Depression appears to have been caused by share speculation using borrowed money (which is why since then banks only lend out a small fraction of the value of shares you give as security - unless you are doing a leveraged buy-out - which has turned into another disaster area, of course).

What I am trying to say is that lending can only be repaid out of future income streams, "security" in the sense of being secured on land and property (or shares, or anything else) gives banks and their depositors a totally false sense of security.