Been There, Done That, Got the T-Shirt
Forgive me for greeting the latest financial meltdown with a big yawn.
We are facing a combination of two textbook cycles, neatly overlaying each other:
1. Classic speculative cycle:Â something catches the eye of speculators, they drive it up in price in search of (utterly unproductive) speculative profits, the rising price produces a self-fueling speculative bubble, and then something happens to prick confidence, convert greed to fear, and the whole thing implodes.Â We’ve seen it many, many times before — from tulip bulbs, to dot-coms.Â The bubble always bursts, seldom (to invoke Galbraith) in an orderly manner.Â The spark for it all this time was mortgage-backed securities and commercial paper: neat gimmick, while it worked, but vastly oversold, and now the speculators are (rightly) paying the price.
2. Classic bankers’ cycle:Â money supply and credit creation in our economy is run by bankers who seek to maximize their private profits. (That’s a very strange criteria to govern a banking system by, something we should collectively think about in coming years.)Â In maximizing their profits, they (like the speculators) constantly trade off greed versus fear: the profits to be earned on pushing new loans into the market, versus the fear that some of those loans will never be repaid.Â The time lags and uncertainty between loan issuing and loan defaulting create dynamic cycles: at first confident bankers worry little about default, pushing gazillions of dollars in new debt, then something occurs to prick their confidence, and they suddenly stop issuing debt (sometimes even calling in existing loans).Â This cycle has also occurred many, many times in the history of modern credit capitalism.
Note that both cycles are driven by the hunt for private profit — that same animating force that is supposed to be the source of all economic efficiency.Â Doesn’t look so efficient right now, does it?
But is there really such a fearsome economic risk from the current dust-up?Â I tend to think not.Â In terms of the speculative losses, they will have almost no impact on the real economy.Â The speculators and financiers who raked it in while the MBS boom was inflating, did precious little real work in the economy.Â Their equally large paper losses will now have precious little real impact on growth or investment.
#2 is far more dangerous to the real economy than #1.Â But even here I am relatively sanguine.Â Real economic conditions (in aggregate) are relatively strong.Â Banks are still making gazillions in profits, and will want to keep making that money.Â And central banks (to their credit) are indicating their determination to keep the credit stream flowing.Â (See my related post which endorses those interventions — but highlights their one-sded character.)
If a bank actually collapsed, or if bread-and-butter lending (to home-owners, car-puchasers, and businesses) started to contract, then I’d be more worried.Â I don’t see that yet.
We should take advantage of the current moment of fear, however, to highlight the fundamental flows with a financial system driven by:
1. Non-productive speculative behaviour of investors
2. Private banks’ control of the money system.
There are more efficient ways to design and manage a financial system, and this is a good time to start talking about them.