How to Prevent Future Credit Bubbles?

[Parodite]

Seems to be more a question of how to manage them, i.e. preventing very destructive bigah boom bubbles to arise in the system while still let the soup boil productively and having some leverage.

FWIW

How to Prevent Future Credit Bubbles?

SUBMITTED BY RAJ NALLARI ON WED, 02/10/2010 - 13:01

Several institutions, such as the US Federal Reserve Bank, the Bank of England, the Bank for International Settlements, and the IMF among others as well as private consultancy firms (e.g. McKinsey) have opined on the above question. Here is what we know from their writings. There is now a broad consensus that advanced country monetary policy had focused almost exclusively on inflation-targeting or in the case of the US, a very narrow definition of price stability, and had neglected the speculative bubbles which were jeopardizing the financial stability. The correct policy response during 2002-08 should have been higher policy rates and containing the credit-driven asset booms. But the identification of bubbles and credit booms is fraught with problems. Should credit growth of 1.5 times the nominal GDP be considered a credit boom?

[...]

http://blogs.worldbank.org/growth/how-p ... it-bubbles

[Enki]

I think managing them is one of the major arguments for a social safety net.

It would make a whole lot more sense to bail the people out rather than the industries. Let the industries go boom and bust, they will retool quicker and new industries will crop up faster if the government weren't so busy distorting the market by picking the winners.

In the meantime we have to stop blaming the individual worker when he gets shafted by the boom/bust cycle.

[Simple Minded]

I think managing them is one of the major arguments for a social safety net.

It would make a whole lot more sense to bail the people out rather than the industries. Let the industries go boom and bust, they will retool quicker and new industries will crop up faster if the government weren't so busy distorting the market by picking the winners.

In the meantime we have to stop blaming the individual worker when he gets shafted by the boom/bust cycle.

Agreed, guarantees encourage excessive risk taking.

[AzariLoveIran]

.

" How to Prevent Future Credit Bubbles ? " ! ! ! ! !

" Credit Bubbles " act as Laxative

Cleans up your intestine

separates fools from their money

necessary in an vibrant economy like America

only, the frequency & the crooks must be kept under control

.

[Typhoon]

If history is any guide, I doubt that credit [financial] bubbles can be prevented.

Too many gain too much - at least in the short term.

In the longer term, each such bubble leads to a voluntary transfer to and concentration of wealth in a small, but powerful, minority.

[Simple Minded]

If history is any guide, I doubt that credit [financial] bubbles can be prevented.

Too many gain too much - at least in the short term.

In the longer term, each such bubble leads to a voluntary transfer to and concentration of wealth in a small, but powerful, minority.

who eventually self destruct. Until human nature changes, the cycle will continue. tulip bulbs, farmland, stocks, housing, gold, college education, etc. not necessarily in that order.

The potential of loss minimizes risk taking, just like hangovers discourage binge drinking. Easy credit or cheap money is a helluva narcotic.

[Parodite]

As long as the people who gain most by bigah bubbles also decide on the rules and regulations.. nothing will change for certain. And since it is those few who also buy their power in politics via legalized bribery... the chance for a better management of this industry will be small for the foreseeable future.

FWIW: Technically, it seems to me, this all is a non-problem. As an analogy: You can design and regulate the electrical circuitry in a building in such a way that really lethal events are made very unlikely to happen. For instance by not being so stupid as to have just one big circuitry with only one fuse to secure the system in case of a calamity; instead, you compartmentalize the system with sub-circuits, each with its own fuse. You also let sub-circuits to shut-off automatically if sensors detect leakages or when power consumption exceeds a certain amount.

Now in the past, the financial industry was compartmentalized into sub-circuits and for similar reasons of safety; [1] High risk investment banking, [2] low risk commercial banking (the bulk of all our savings, pensions) and [3] Insurance. Because you don't want the whole systems to blow up and with only fuse, i.e. become "too big to fail". But those smart "financial engineers" headed by Greenspan and with two morons like Reagan and Thatcher as their pawns, thought lets be smart and "deregulate" the whole thing, by removing the barriers and make it a one-fuse system where all money /electricity, can flow through any pipe-line; above ground and more conveniently... underground, where all the toxic products were designed, packaged in sexy port-folios to be sold back and forth before anybody knew what was happening. Until the one-fuse started to beep a very loud red-alert! Too big to fail... i.e. the taxpayer hijacked by the people who designed this system in order to make more money as the only goal. If the customer dies? It doesn't matter.. as long as more money is made and people believe your lavender and buy it.

So in conclusion, under the pretense of "deregulation", a couple of key people in the investment banking industry pushed their agenda to remove the barriers that stood in between them and the enormous amounts of savings stashed away in "the low-risk commercial (retail) banking circuitry". All the wonderful things they could do with that money! Invest better... take more risk... and covertly underground.. maximize profits from speculative trading and shoving around toxic boxes in Ponzi style.

The word "deregulation" sells in America; every patriotic American loves deregulation and is suspicious of regulations, especially those invented by the government. However, what those "deregulators" did in this case and in fact, is simply selling the customer a very badly designed and dangerous architecture of power-supply and electrical circuitry: a one-fuse system bound to blow up your house in a rather near future whilst allowing them to make loads of money on the struggling patient before it dies on the street. Greece is the first example of a big victim, in vivo.

See also: The Credit Bubble: Deregulation Gone Wild

[Parodite]

Did anyone see the 2010 documentary Inside Job ? Any opinions? Is it accurate?

[Parodite]

Did anyone see the 2010 documentary Inside Job ? Any opinions? Is it accurate?

Just have watched half of it. Wow. The real deal. Excellent.

Fixing the financial industry should be the top priority of any next US government, Euro governments. But does it surprise anyone that it is not on their agenda? That the public is being sold same old empty phraserisms by every and all party here?

Be angry at capitalism, or at the democrats, or at the republicans. Or blame socialism for all I care, or the crooked Greek, or the arrogant Germans! Jawoooohl... But this crisis has none and nill to do with any of these. It just is a car that needs to be fixed and it can be fixed easily. Of course damage has already occurred and more bubbles will burst. We have to take the losses. What's wrong with the car is pretty obvious as well as the fix it needs IMHO.

Whether it will run best on dollars, or some new type of currency-fuel and kept in check by gold or other inert precious solids (I propose to just take the speed of light as the constant that will keep the system balanced, why not?).. is not so important. The car just needs new breaks, new set of tires, a compartmentalized electrical circuit with 4 fuses, modern sensors added to the system that do the checks and have the status data online on your IPhone 24/7 financial cyberApp.

And: have all the junk-tech removed that was added by the gangs who sold you the idea that you need it whereas they just needed you to believe that you needed it in order to empty your pockets more efficiently. (I would speculate that Wall street and the Federal Reserve are by and large such dispensable gadgets).

[Parodite]

Interview (nov 29 2010) with the director of Inside Job, Charles Ferguson on Charlie Rose.

[Parodite]

Another good (Dutch) documentary, with most interviews in English, worth to watch!

It's about automated financial trade.

Money and Speed: Inside the Black Box (Tegenlicht)

x8SMjyXdc3I

Quants: The Alchemists of Wall Street (Marije Meerman, VPRO Backlight 2010)

ed2FWNWwE3I

[Zack Morris]

As long as the people who gain most by bigah bubbles also decide on the rules and regulations.. nothing will change for certain. And since it is those few who also buy their power in politics via legalized bribery... the chance for a better management of this industry will be small for the foreseeable future.

FWIW: Technically, it seems to me, this all is a non-problem. As an analogy: You can design and regulate the electrical circuitry in a building in such a way that really lethal events are made very unlikely to happen. For instance by not being so stupid as to have just one big circuitry with only one fuse to secure the system in case of a calamity; instead, you compartmentalize the system with sub-circuits, each with its own fuse. You also let sub-circuits to shut-off automatically if sensors detect leakages or when power consumption exceeds a certain amount.

Now in the past, the financial industry was compartmentalized into sub-circuits and for similar reasons of safety; [1] High risk investment banking, [2] low risk commercial banking (the bulk of all our savings, pensions) and [3] Insurance. Because you don't want the whole systems to blow up and with only fuse, i.e. become "too big to fail". But those smart "financial engineers" headed by Greenspan and with two morons like Reagan and Thatcher as their pawns, thought lets be smart and "deregulate" the whole thing, by removing the barriers and make it a one-fuse system where all money /electricity, can flow through any pipe-line; above ground and more conveniently... underground, where all the toxic products were designed, packaged in sexy port-folios to be sold back and forth before anybody knew what was happening. Until the one-fuse started to beep a very loud red-alert! Too big to fail... i.e. the taxpayer hijacked by the people who designed this system in order to make more money as the only goal. If the customer dies? It doesn't matter.. as long as more money is made and people believe your lavender and buy it.

So in conclusion, under the pretense of "deregulation", a couple of key people in the investment banking industry pushed their agenda to remove the barriers that stood in between them and the enormous amounts of savings stashed away in "the low-risk commercial (retail) banking circuitry". All the wonderful things they could do with that money! Invest better... take more risk... and covertly underground.. maximize profits from speculative trading and shoving around toxic boxes in Ponzi style.

The word "deregulation" sells in America; every patriotic American loves deregulation and is suspicious of regulations, especially those invented by the government. However, what those "deregulators" did in this case and in fact, is simply selling the customer a very badly designed and dangerous architecture of power-supply and electrical circuitry: a one-fuse system bound to blow up your house in a rather near future whilst allowing them to make loads of money on the struggling patient before it dies on the street. Greece is the first example of a big victim, in vivo.

See also: The Credit Bubble: Deregulation Gone Wild

Where is Mr. P to tell us that because this only happened in the subprime mortgage market, and not the credit card or car loan markets, that it was due entirely to government intervention in the markets?

[Parodite]

Where is Mr. P to tell us that because this only happened in the subprime mortgage market, and not the credit card or car loan markets, that it was due entirely to government intervention in the markets?

The government was bought by those bankers to interfere in the market.

[noddy]

Where is Mr. P to tell us that because this only happened in the subprime mortgage market, and not the credit card or car loan markets, that it was due entirely to government intervention in the markets?

The government was bought by those bankers to interfere in the market.

the government and the bankers are the same people, they look after each other and its personal choice as to who gets blamed, lefties like blaming the banks, righties like blaming the government.

as a curmudgeon, i blame the people for putting their entire incomes into the casino and trusting the mafia.

[Simple Minded]

Where is Mr. P to tell us that because this only happened in the subprime mortgage market, and not the credit card or car loan markets, that it was due entirely to government intervention in the markets?

The government was bought by those bankers to interfere in the market.

the government and the bankers are the same people, they look after each other and its personal choice as to who gets blamed, lefties like blaming the banks, righties like blaming the government.

as a curmudgeon, i blame the people for putting their entire incomes into the casino and trusting the mafia.

As a fellow curmudgeon, I agree. Lefties, righties, bankers, and govt apparachiks all appear to exhibit typical human behavior.

Shutting off your brain and running with the herd only works for a little while...... only when the herd is not being stupid.

Trying to insulate people from the consequences of their behavior only slows down the inevitable lesson.

Hindsight that blames others is blindness. Indication that the lesson has not been learned and will be repeated.

[Parodite]

As a fellow curmudgeon, I agree. Lefties, righties, bankers, and govt apparachiks all appear to exhibit typical human behavior.

Shutting off your brain and running with the herd only works for a little while...... only when the herd is not being stupid.

Trying to insulate people from the consequences of their behavior only slows down the inevitable lesson.

Hindsight that blames others is blindness. Indication that the lesson has not been learned and will be repeated.

That too and more than that. One cannot blame everybody equally and for same. Which suggests that it is useful to differentiate - if one wants to solve problems. Consumer greed and stupidity is one thing. Bankers selling poisened products without telling the consumer is another.

[noddy]

As a fellow curmudgeon, I agree. Lefties, righties, bankers, and govt apparachiks all appear to exhibit typical human behavior.

Shutting off your brain and running with the herd only works for a little while...... only when the herd is not being stupid.

Trying to insulate people from the consequences of their behavior only slows down the inevitable lesson.

Hindsight that blames others is blindness. Indication that the lesson has not been learned and will be repeated.

That too and more than that. One cannot blame everybody equally and for same. Which suggests that it is useful to differentiate - if one wants to solve problems. Consumer greed and stupidity is one thing. Bankers selling poisened products without telling the consumer is another.

mr p would remind you that the poisoned products were government created and the government was also highly aware of them being onsold.

which doth make the "more government oversight" solution a tad more complicated... which brings me back to my stance, its impossible to seperate the bankers and the politicians on this one, they aint seperate groups of people with different agendas, they are old friends cooperating.

[Enki]

The government regulatory agencies are a mockery. Monsanto runs the FDA and has unleashed the dogs of war upon small traditional producers.

[Parodite]

mr p would remind you that the poisoned products were government created and the government was also highly aware of them being onsold.

which doth make the "more government oversight" solution a tad more complicated... which brings me back to my stance, its impossible to seperate the bankers and the politicians on this one, they aint seperate groups of people with different agendas, they are old friends cooperating.

It seems unlikely that government buddies knew exactly what banker buddies knew and vice versa. They each knew just enough to both sit and act together in their win-win baskets. The overlap of knowledge doesn't need to be big to make it work. In fact, it wouldn't be in anyone’s interest to know too much. All they need to do is look at their bank accounts before-and-after.

As of interest in the documentary Inside Job, it was mentioned that Bill Gates did think of Goldman Sachs as his biggest competitor, because GS was hiring the compatible and best brains but usually for better salaries. Those people tend to be much smarter than politicians. Realize where the money is being generated... i.e. locus of power to drive the process, then add politicians who receive money in return for favorable (non)regulation. Politicians are just little henchmen grabbing a few extra bucks after giving the beast what it wants.

[Azrael]

I think managing them is one of the major arguments for a social safety net.

It would make a whole lot more sense to bail the people out rather than the industries. Let the industries go boom and bust, they will retool quicker and new industries will crop up faster if the government weren't so busy distorting the market by picking the winners.

In the meantime we have to stop blaming the individual worker when he gets shafted by the boom/bust cycle.

Agreed, guarantees encourage excessive risk taking.

Yes, that fits in to Minsky's Financial Instability Hyopthesis. Excessive risk taking leads to a "Minsky Moment".

[Azrael]

The government regulatory agencies are a mockery. Monsanto runs the FDA and has unleashed the dogs of war upon small traditional producers.

That's a good example of Regulatory Capture.

[Azrael]

Jan Hatzius: the Case for a Nominal GDP Level Target

From site:

With short-term interest rates near zero and the economy still weak, we believe that the best way for Fed officials to ease policy significantly further would be to target a nominal GDP path, indicating that they will use additional asset purchases to help bring actual nominal GDP back to trend over time.The case would strengthen further if deflation risks reappeared clearly on the radar screen.

While a shift to a nominal GDP level target would be a big decision, it would be consistent with the Fed's dual employment and price mandate. It differs from the standard Taylor rule interpretation of the dual mandate in two ways. First, it depends on the price level, not the inflation rate. Second, it puts more weight on the output/employment part of the mandate.

Simulations using a highly simplified model suggest that a nominal GDP target could improve economic performance substantially compared with a standard Taylor rule. In the model, the economy receives a significant boost through lower real long-term interest rates, via a delay of the first funds rate hike and temporarily higher expected inflation.

The improvement in economic performance in our model, however, depends critically on the credibility of the Fed's commitment. We believe a nominal GDP level target is less likely to dislodge long-run inflation expectations than other proposals to ease monetary policy significantly further. First, it is not very sensitive to errors in estimating potential output. Second, it is simple, which promotes accountability. Third, there is a natural exit strategy.

Pairing a nominal GDP target with additional asset purchases would enhance the credibility of the shift in the short term. And the shift in the target would raise the likelihood that the asset purchases will be effective—making the whole greater than the sum of the parts.

[Simple Minded]

The government regulatory agencies are a mockery. Monsanto runs the FDA and has unleashed the dogs of war upon small traditional producers.

That's a good example of Regulatory Capture.

Excellent point Az,

When markets are not "regulated," there is a higher ROI for owners, investors, and the public to invest in productive assets rather than buy political influence and favors.

[Juggernaut Nihilism]

My pet solution is a progressive transaction tax based on the length of time a security is held.

Example:

Any position held for less than 1 day: 90% tax (eliminates HFT and day trading parasites who add no value... and don't give me any of that debunked lavender about liquidity)
Position held between 1-7 days: 75% tax (with certain exceptions allowed, for example when founders first take a company public, they can unload some stock)
Between 1-4 weeks: 50% tax
1-3 months - 35%
3-12 months - 20%
1-3 years - 10%
>3 years - 0%

(The tax is on capital gains, obviously, and would not affect people who take a loss on a position.)

It would eliminate worthless short-term speculators and wipe out this garbage parlor game where traders don't even know anything about the businesses in which they're "investing", and encourage legitimate investment in viable enterprises. And don't give me any garbage about how the short-term speculators don't need to know the businesses to exploit inefficiencies and that their presence adds information and therefore allows for better price discovery. That is total bullshit and the reason we're even having this conversation: they create inefficiencies and ruin price discovery.

And no, I could give a flying genuflect less if a bunch of useless day traders have to collect unemployment for a time while they get retrained for an actual genuflecting job.

[Ammianus]

How do you prevent credit bubbles?

You don't. Instead, you learn to absorb and process the pain that comes whenever such things occur, learn and implement the lessons you'll take to make sure it never, ever happens again. Just as critical is to make sure whoever dipped their dirty little mouths blowing the bubble pay, dearly, severely, and bloodily. An ounce of these cures will be worth more than a pound of prevention.