Wednesday, November 11, 2009

Drinks With a Friend Are the New Cab Driver

Megan, always the industrious, can't help but mix work with pleasure:

About a week ago, I was having drinks with a friend and discussing John Kenneth Galbraith's dictum that "all financial innovation involves ... the creation of debt secured in greater or lesser adequacy by real assets," wrote the economist John Kenneth Galbraith in 1993. And "all crises have involved debt that, in one fashion or another, has become dangerously out of scale in relation to the underlying means of payment."
I like how she frames the story. Intellectual analysis is ordinarily so boring, but, bby setting the scene in a loud bar with an unknown friend, it adds a bit of levity to an otherwise dry discourse.
I have espoused this theory at various points, and he agreed with it. But we came to a sticking point: what about the stock market bubble?
Uh, which stock market bubble? I mean, granted, I'm not a super financial analyst, but haven't all contractions been preceded by a rise and coincided with a fall in stock market prices? Oh, you mean the LAST bubble. Well, sure, it's convenient cause she can remember it, but I bet that's not the reason she is drawing a comparison with it.
And the bubbliest companies weren't using debt, because they didn't have any cash flow.
Right. The companies weren't using debt 'cause they didn't have any money. They were spending their own money.... that they didn't have. Or.. what? I dunno. I guess venture capital isn't debt cause it's not one person giving another person money for the promise of future returns.

Eventually, we get the part where the post starts to make sense and is written in a semi-coherent manner. That is, the part where she blockquotes someone else.
Asset-price bubbles can be separated into two categories. The first and dangerous category is one I call "a credit boom bubble", in which exuberant expectations about economic prospects or structural changes in financial markets lead to a credit boom. The resulting increased demand for some assets raises their price and, in turn, encourages further lending against these assets, increasing demand, and hence their prices, even more, creating a positive feedback loop.

(...)

The second category of bubble, what I call the "pure irrational exuberance bubble", is far less dangerous because it does not involve the cycle of leveraging against higher asset values. Without a credit boom, the bursting of the bubble does not cause the financial system to seize up and so does much less damage. The second category of bubble, what I call the "pure irrational exuberance bubble", is far less dangerous because it does not involve the cycle of leveraging against higher asset values. Without a credit boom, the bursting of the bubble does not cause the financial system to seize up and so does much less damage. For example, the bubble in technology stocks in the late 1990s was not fuelled by a feedback loop between bank lending and rising equity values; indeed, the bursting of the tech-stock bubble was not accompanied by a marked deterioration in bank balance sheets.
Yeah, what-the-fuck-ever. This is all retarded. The financial bubble collapsed the financial industry because it was a FUCKING FINANCIAL BUBBLE. Likewise, the TECH bubble had adverse effects on the TECH industry. The stock market went down 'cause, duh, that's what it does when the economy gets bad. How the fuck do financial "experts" need ME to explain that to them?

If you want to know the difference between our most recent crash and the next most recent crash (because your dimwit brain doesn't know any fucking history, so just draws comparisons between the convenient rather than the relevant) look at what fueled them. The tech bubble was fueled by the invention of something new. Can't figure out what that is? Hint: It's staring you in the face. As ridiculous as pets.com was, the huge influx of capital into the internet (and computers generally) was somewhat rational. Though many of the dot-coms crashed, one or two little known companies such as Amazon, Netflix and others still exist today, churning out a modest profit. There was OVERexuberance in genuinely exciting new technology which has, in subtle ways, changed the way that we live. It may not seem like it, but the internet actually touches almost every facet of your life in a barely perceptible manner.

The housing market, OTOH, (What did "OTOH" mean in 1991? Oh, that's right, NOTHING.) did not change at all. There was not the invention of some great new bulldozer. We didn't revolutionize the way we create load bearing beams. No. We convinced ourselves that one of the most non-transferable assets people had was an invaluable commodity so unique that it's possession alone was enough to back the generation of more of it. We basically bought a perpetual motion machine.

We convinced ourselves that we didn't need to actually produce anything in order to be wealthy as long as we just sold our own assets back to ourselves using debt hidden in too obscure a way for our creditors to know what the fuck was going on. We had the brilliant back up plan of using underfunded insurance as a hedge against betting on the impossible. In short, we lied to our fucking selves.

The bubble was centered, appropriately, on absolutely nothing. It wasn't OVERexuberance it was completely BULLSHITexuberance. That's why this crash was so bad. We slashed and burned way more forest than we needed to AND found out the land we'd cleared had toxic soil. I don't know how the fuck this is so hard to see. The ever knowing market bet the farm on a fucking unicorn and now it can't even find a horse to glue a traffic cone on. I guess admitting that would just be too much for some people. Perhaps they're sold on something and just can't let go of the notion that it's more valuable than it is. Brings about new meaning to the phrase "over-invested in the market."

3 comments:

clever pseudonym said...

About a week ago, I was having drinks with a friend and discussing John Kenneth Galbraith's dictum that "all financial innovation involves ... the creation of debt secured in greater or lesser adequacy by real assets," wrote the economist John Kenneth Galbraith in 1993.

*Headsmack* Edit, Megan. EDIT, DAMN IT. I don't know who is paying this person, but I want to beat them up so badly it burns. She may very well be the sloppiest "journalist" I have ever encountered.

nilsey said...

i hereby coin (well, re-coin) the phrase "thought bubble" -- wherein you and a few like minded friends thoughtfully convince each other of the proposition that you start out believing. preferably "over drinks."

Kenmeer livermaile said...

"We basically bought a perpetual motion machine. "

Summa neato, or, translating from pig latin, neat summation.