Tuck This Away: Market “Bubbles” May Be As Inevitable As Business Cycles
November 11th, 2009 at 10:25 am By Lee EgerstromIf you really want to understand the current financial crisis, add another opus from the Wall Street Journal to your yellowing pile of indispensable literature.
On Nov. 3, Mark Whitehouse (yep, that’s his name) wrote the Journal’s center column feature on Yale economist John Geanakoplos. The prof has an evolving theory that investors drive prices up into bubble territory when they can borrow too easily. And lenders aid this bubble formation by creating ever-increasing ways to package, repackage and keep passing around finite collateralized assets to fuel the buying/investing.
In usual Journal center column form, the story is charmingly written and well documented with expert voices of economists from here to Timbuktu. The good news is that a lot of these deep thinkers are looking at Geanakoplos theory for ways that financial regulators may prevent a repeat down the road.
That would be great, if it could happen. But we all should have discovered the theory from the farm financial crisis in the 1980s when farm real estate prices formed a bubble that burst. (Remember the Agriculture secretary who opined: “Buy farmland. They ain’t making any more of it.”)
That financial collapse brought down about the same number of banks as those failing to date in the current collapse. Several rural Minnesota banks failed in that go-round, and Twin Cities banks felt and spread the pain as well. Since then we’ve had the savings and loan debacle. But that had different influences than the bubbles that formed in the 1980s farmland or this decade’s housing market.
Geanakoplos’ theory deserves careful scrutiny in academia, all across the land. And by regulators in Washington, New York and St. Paul. If we don’t learn to prevent bubble-forming activity, we will continue to do so because there is too much money to be made when we’re inflating the bubble.
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