I was reading Henry Blodget’s brilliantly written article Why Wall Street Always Blows It from the Atlantic back in 2008. It is likely that Henry doesn’t agree with all the points he made in this article, but it is interesting to take a look at it anyway. There are a couple of points he made that are worth looking at again. For one thing, I take issue, and maybe Henry does now too, with the view that bubbles are natural. I think some bubbles, and maybe more than some, are quite unnatural. Henry made this statement in the Atlantic article:
first, bubbles are to free-market capitalism as hurricanes are to weather: regular, natural, and unavoidable. They have happened since the dawn of economic history, and they’ll keep happening for as long as humans walk the Earth, no matter how we try to stop them. We can’t legislate away the business cycle, just as we can’t eliminate the self-interest that makes the whole capitalist system work. We would do ourselves a favour if we stopped pretending we can.
Certainly, the effort of Basel 2 in 1998 to allow off balance sheet banking was a way to infect a bubble with a very bad virus. That virus was the dishonest manipulation and even hiding of bad loans. Hiding bad loans, using shadow banks, and propelling a flood of easy money onto the housing commodity, starting with vigor in late 2003, was certain to blow a bubble. It seems quite premeditated and criminal to me. Of course, if the criminals control the financial system, then it is a legal crime. But crime it is nonetheless. And it was not a victimless crime, because people got hurt badly.
Henry makes another interesting statement regarding the effort to stop the bust from happening again. Henry said:
As we work our way through the wreckage of this latest colossal bust, our government—at our urging—will go to great lengths to try to make sure such a bust never happens again. We will “fix” the “problems” that we decide caused the debacle; we will create new regulatory requirements and systems; we will throw a lot of people in jail. We will do whatever we must to assure ourselves that it will be different next time. And as long as the searing memory of this disaster is fresh in the public mind, it will be different. But as the bust recedes into the past, our priorities will slowly change, and we will begin to set ourselves up for the next great boom.
And he said this very interesting thing:
The really big busts, in fact, the ones that affect the whole market and economy, are usually separated by more than 30 years—think 1929, 1966, and 2000. (Why did the housing bubble follow the tech bubble so closely? Because both were really just parts of a larger credit bubble, which had been building since the late 1980s. That bubble didn’t deflate after the 2000 crash, in part thanks to Greenspan’s attempts to save the economy.) By the time the next Great Bubble rolls around, a lot of us will be as dead and gone as Richard Whitney, Jesse Livermore, Charles Mitchell, and the other giants of the 1929 crash. (Never heard of them? Exactly.)
First, we never prosecuted anyone. The cartel doesn’t even have to worry about jail time anymore. That is quite different than times past. Second, Volcker came on the scene for a moment and vanished. Bachus, a Republican from Alabama, wants no regulation of the investment bank casino. Third, I bet the next bubble will roll around a lot sooner than Henry predicted. Why would this happen? Well, the credit bubble can no longer unwind. At least that is what we are told. Either it will really unwind, or it will continue to bubble and bubble for a period of time.
But I don’t think that the crash of 2008 was anything like the Great Depression. There is too much money floating around with which to flood commodity demand upward. People are storing stuff like squirrels everywhere, in China, on boats, in obscure places. We used to collect bottle caps, and now people collect oil, copper, and they just collect contracts sometimes, without even bothering to see the real product.
We have commodity bubbles, bond bubbles, stock bubbles, everything except real estate. But even real estate is being controlled by the big bankers, and unwanted houses are being put on the market like diamonds were with DeBeers, when they controlled supply and demand. Every commodity is carefully controlled, in production. We are getting too efficient to have overproduction. Yet some want major overproduction in housing going forward. Even Paul Ryan predicts a subdued housing bubble in his budget attacking the old and the poor!
Something is indeed different this time Henry. I can’t quite put my finger on it, like Pink Floyd, but it certainly is uncertain going forward, and to my way of thinking, not bubble free. Can mainstreet afford all these continual financial schemes? With the apparent failure to reflate in traditional ways and through QE, is a housing bubble scheme really that far off?