@Razzleg,
Razzleg;163045 wrote:We can try, but it seems to me that bubbles are exceptional events; there is no standard manner in which they develop.
Well, the real world thing is always exceptional, but as an abstract thing an economic bubble is a pretty simple construct. All we need is people bidding more for something, such as houses or Microsoft shares, than it is worth. And that artificially high value then being in danger of crashing back to more real values. Of course nobody knows what the 'real value' of an asset is. But that's what the market is for. People bid up as long as they think they will get more tomorrow than they have to pay today, at some point nobody is willing to pay yet more for something, and then the ones who currently own it lose their investment. Of course nobody wants to be the one owning an asset when it's price deflates. That's how the market takes care of bubbles. There would be small fluctuations, due to misjudgments, but no dangerous bubbles.
But when government bails out a bubble, then of course there is no risk associated with investing in one. You just build up the pyramid scheme until it bursts and then you get bailed out and build another one. This has been going on for the last 30 years, the brokers love it. If the precedent of government bailouts is set, they just have to invest in something that is important enough to be bailed out by government. These days the consideration by brokers is not "will this investment pay off", but "will government bail it out". For example the Russian bubble in 1998, the investors thought that western governments would bail out Russia because Russian nukes might fall into bad hands.
Razzleg;163045 wrote:I am not suggesting, nor have I ever suggested, that credit bubbles "naturally arise in the absence of 'regulation'." Credit bubbles arise in a variety of ways, as the result of a congruence of disparate events. I do think that the regulation of standards and procedure help to prevent bubbles before they begin, but whether it is government regulation or regulations within the industry at hand matters very little to me. And it is perfectly possible that an unregulated market could continue to function without generating credit bubbles, but I think it's highly unlikely.
People who advocate free markets, like me, don't want
unregulated markets. You know, like
no regulation, anything goes, pirates and anarchy. We want a framework of laws and property rights and the state to protect those property rights, that's
regulation in a sense. What we do not want is intervention, i.e. the government stepping in with it's coercive power to change the market to some outcome. Sadly that is often called 'regulation', equating everything that government does into one, whether it is safeguarding property rights or intrusive intervention. In the western world government are far to intrusive, therefore liberals often call for less intervention, small government, but we are not against regulation, for unregulated markets. There's regulation and there's intervention. The collectivists won the war of words in calling all government action 'regulation'. Thus when a financial mess like this one happens because of lack of 'regulation' (meaning government didn't do it's job of providing a free market framework), they can call for more 'regulation' (more government intervention). It's a bit like using the same word for 'beer' and 'water', you know, they say we should drink 8 glasses of 'water' a day. :drinking:
Razzleg;163045 wrote:Classical economic theory requires the participants of the system to be rational, and I think it is obvious that most of us are something other than rational in a large portion of our decision making. I'm not condemning the participants, rather I think that the theory needs to be reevaluated and modified to reflect reality as it presents itself.
Ah, bounded rationality. No, we are not rational. But free market economics does not require people to be rational. Take above description of economic bubbles. Brokers can make all the irrational bets they want, in the absence of government intervention the irrational ones would go broke and have to leave the profession. It is only continuous government bail outs that allow them to continue. But what if they are all irrational? We might over-value assets, but they will also under-value them. There would be mild build-ups of asset bubbles, waves, that burst within a day or week, unnoticed by most of us. There is no point in betting up assets to irrational heights, everybody would be aware that it is a bad investment.
It's all about economic education, if you want to make sense of it read the book I posted earlier, or another one on the topic. I'm not saying I know it all, not to sound smug. But the best thing to do is just to read how it all works instead of guessing about it with limited knowledge on the internet.
Razzleg;163045 wrote:Also, I think that the rationality considered in classical economic theory includes an economic actor's awareness of the systemic consequences of their individual action. I'm not altogether sure that the indicators that identify a developing bubble are immediately available to one is who scanning economic data out of a sense of self-interest, either short-term or long-term.
I'm not even sure how to answer your other questions. Do you think any of the participants in the housing market thought, at least in the beginning, that they were contributing to the conditions that would lead to a credit bubble? Clearly, many, if not most, of the participants were only acting on their short-term interests. And who knows, perhaps I did contribute to the development of a new credit bubble last week. Credit bubbles arise as the cumulative result of millions of individual decisions, perhaps mine was one of them.
Yes, bubbles, and all economic effects for that matter, are systemic, not the consequences of intentions. That's exactly why the irrational decisions of individuals make no difference to the market as a whole, market behaviors are systemic. Some people have a hard time wrapping their head around something being 'systemic', they think everything that happens has to be intended by a rational being. For example, if wages rise that can't be the systemic consequence of scarce labor bidding higher rates, it must be because of the intentions of unions. Or if women on average make less than men, it can't be because they have other priorities such as having children (not to mention access to the credit cards of their husbands), it must be because of the misogynist intentions of employers, the infamous glass ceiling.
People who are unwilling or unable to think in terms of systemic consequences are usually bad capitalists, and require government to make a living, e.g. professors,
intellectuals, activists, some scientists, the unemployable.
