Is There a "Bubble" Bubble?

• Report this Comment On December 14, 2009, at 3:21 PM, speedlimitdriver wrote:

  How many angels can dance on the tip of a pinhead? People get caught up in manias and lose their money--often to the same people who created the manias. That's the bottom line (whether or not you can disprove the existence of bubbles by creating a straw-man definition, then disproving it with free-market dogma).

• Report this Comment On December 14, 2009, at 3:23 PM, faberculus wrote:

  Well the Latin for bubble is bulla, so perhaps a bubble is just the logical conclusion of bullishness.

• Report this Comment On December 14, 2009, at 3:47 PM, theHedgehog wrote:

  Oh, this free-market mantra again? There is no free market. The consumer is, by and large, not well represented in legislation or in the transactions he makes. As a result, the market is strongly skewed toward enabling corporate profits at any cost to the consumer. Yeah, there's this legal fiction that people enter a transaction with their eyes open and well educated, but as the term implies, it's all fiction.

  Every time the market crashes for one reason or other, the "reason" is always that the consumer was being milked more heavily than was supportable.

  So, yes, the market is self-correcting, but only if you count booms and crashes as a viable correction mechanism.

• Report this Comment On December 14, 2009, at 3:48 PM, theHedgehog wrote:

  Oh, this free-market mantra again? There is no free market. The consumer is, by and large, not well represented in legislation or in the transactions he makes. As a result, the market is strongly skewed toward enabling corporate profits at any cost to the consumer. Yeah, there's this legal fiction that people enter a transaction with their eyes open and well educated, but as the term implies, it's all fiction.

  Every time the market crashes for one reason or other, the "reason" is always that the consumer was being milked more heavily than was supportable.

  So, yes, the market is self-correcting, but only if you count booms and crashes as a viable correction mechanism.

• Report this Comment On December 14, 2009, at 3:59 PM, Turfscape wrote:

  "Bubbles" are a product of human nature being rooted in the illogical. Bubbles are explained by irrational exuberance and the incessant need for people to find patterns where none exist.

  In other words, a bubble is the few taking advantage of the many at a time of irrational thought. Not all trades equal out. There is not necessarily one buyer for one seller. So, if a few sellers hold large reserves of a commodity or equity, and a trend emerges, they are in a position to exploit that trend...whether that exploitation is right, wrong or indifferent.

• Report this Comment On December 14, 2009, at 4:39 PM, TMFDiogenes wrote:

  "There are two sides to every trade: For every manic speculator buying into 'bubbly' markets with visions of brilliant returns, there's a bearish seller looking to exit that same market." In other words, "since all trades balance, bubbles quite simply don't exist."

  This ignores the law of supply and demand. Just because there are the same number of buyers and sellers doesn't mean demand -- and prices -- can't rise.

• Report this Comment On December 14, 2009, at 4:59 PM, philsie2 wrote:

  This article represents such a micro view to a macro problem. To say that every trade is balanced between a buy and a sell is to completely miss the forest for the trees.

  Look at it this way. To take company XYZ from say $10 to $50 may take 100 million shares trading hands to reach (the inflation of the bubble). But upon realization of price over-inflation and under a flood of sell orders (balanced by buy orders) takes one back to $10 in only 50 million shares (or maybe much less).

  So the movement up (the inflation) took twice as effort as the movement back down (deflation). And while the popping of the bubble may not be instantaneous it is consistent with an analogy of the bubble bursting (whereas it deflates faster and with less effort than it inflates).

• Report this Comment On December 14, 2009, at 5:00 PM, philsie2 wrote:

  This article represents such a micro view to a macro problem. To say that every trade is balanced between a buy and a sell is to completely miss the forest for the trees.

  Look at it this way. To take company XYZ from say $10 to $50 may take 100 million shares trading hands to reach (the inflation of the bubble). But upon realization of price over-inflation and under a flood of sell orders (balanced by buy orders) takes one back to $10 in only 50 million shares (or maybe much less).

  So the movement up (the inflation) took twice as effort as the movement back down (deflation). And while the popping of the bubble may not be instantaneous it is consistent with an analogy of the bubble bursting (whereas it deflates faster and with less effort than it inflates).

• Report this Comment On December 15, 2009, at 8:23 AM, BMFPitt wrote:

  There are more bubbles because how often was the Fed rate at or near zero prior to the past decade?

• Report this Comment On December 15, 2009, at 11:49 AM, neutrinoman wrote:

  The commenters have said a lot of what needs to be said in response to this sort of silly, circular reasoning that "proves" that "bubbles can't exist." But I'll add my $0.475 (that's $0.02 corrected for inflation).

  Of course bubbles can exist. Buying pressure, as measured by bid-ask spreads and other metrics, can surge. Valuations comparing asset prices to non-bubble prices can get way out of line. The crucial thing missing from the micro perspective is the role of leverage. When a seller sells in a bubble market, it's just he or she. But when the buyer buys, it's often the buyer PLUS some lender backing the purchase with credit. There's the origin of the asymmetry that Tamny and others caught up in their naive Efficient Market Hypothesis don't get. The accumulation of debt turns it from a micro to a macro phenomenon. When the bubble pops, the asymmetry goes into reverse: the seller isn't just selling an asset; he or she is trying to deleverage and pay off creditors, that OTHER party. The buyers of such bargains usually don't have such OTHER parties on their backs. The asset markets do indeed readjust, eventually, but in a catastrophic and sudden way. The bubble starts to pop when lenders are no longer willing to lend. But the "pop" doesn't complete until borrowers are no longer willing to borrow. Then you know it's really over.

  We've heard this silly, circular reasoning before, during the 90s. It's *not* "free-market dogma." A real free market has a gold or other objective standard for money. But in the last 15 years, the mindfog of Greenspeak has paralyzed our minds. An artificially strong dollar and Fed-backed ultracheap credit and balance sheet expansion has supported one bubble after another: stocks, housing, commodities, emerging markets, (again) commodities, etc., etc. The fog of Greenspeak tells us that this central-bank-engineered credit boom is part of the beneficient operations of a free market. In fact, it's a savings-squandering, captial-wasting attempt to keep the "wealth effect" going -- you know, people spend more if they own assets with inflated prices.

  In a real free market, the debt markets, trading in gold or some other "objective" money, set interest rates. That places a straightjacket on instabilities in the financial markets. In our system, "people's capitalism, supported by cheap credit," the Fed creates the illusion that Americans can permanently live beyond their means. When one illusion pops, they rush to create more.

  Once, back in the 60s, when Greenspan wrote for Ayn Rand's newsletter, he knew this fact. Somewhere along the way, he got completely lost. The fog of Greenspeak suggests a deeper fog of thought and intention. In his memoir, Greenspan merely and cryptically speaks of the "realities" of the welfare state -- permanent inflation, or repeated, engineered credit booms.

• Report this Comment On December 15, 2009, at 11:54 AM, neutrinoman wrote:

  The commenters have said a lot of what needs to be said in response to this silly, circular reasoning that "proves" that "bubbles can't exist." But I'll add my $0.475 (that's $0.02 corrected for inflation).

  Of course bubbles can exist. Buying pressure, as measured by bid-ask spreads and other metrics, can surge. Valuations comparing asset prices to non-bubble prices can get way out of line. The crucial thing missing from the micro perspective is the role of leverage. When a seller sells in a bubble market, it's just he or she. But when the buyer buys, it's often the buyer PLUS some lender backing the purchase with credit. There's the origin of the asymmetry that Tamny and others caught up in their naive Efficient Market Hypothesis don't get. The accumulation of debt turns it from a micro to a macro phenomenon. When the bubble pops, the asymmetry goes into reverse: the seller isn't just selling an asset; he or she is trying to deleverage and pay off creditors, that OTHER party. The buyers of such bargains usually don't have such OTHER parties on their backs. The asset markets do indeed readjust, eventually, but in a catastrophic and sudden way. The bubble starts to pop when lenders are no longer willing to lend. But the "pop" doesn't complete until borrowers are no longer willing to borrow. Then you know it's really over.

  We've heard this silly, circular reasoning before, during the 90s. It's *not* "free-market dogma." A real free market has a gold or another objective standard for money. But in the last 15 years, the mindfog of Greenspeak has paralyzed our thinking. An artificially strong dollar and Fed-backed ultracheap credit and balance sheet expansion has supported one bubble after another: stocks, housing, commodities, emerging markets, (again) commodities, etc., etc. Greenspeak tells us that this central-bank-engineered credit boom is part of the beneficient operations of a free market. In fact, it's a savings-squandering, capital-wasting attempt to keep the "wealth effect" going -- you know, people spend more if they own assets with inflated prices.

  In a real free market, the debt markets, trading in gold or some other "objective" money, set interest rates. That places a straightjacket on instabilities in the financial markets. In our system, "people's capitalism, supported by cheap credit," the Fed creates the illusion that Americans can permanently live beyond their means. When one illusion pops, they rush to create more.

  Once, back in the 60s, when Greenspan wrote for Ayn Rand's newsletter, he knew this fact. Somewhere along the way, he got completely lost. The fog of Greenspeak suggests a deeper fog of thought and intention. In his memoir, Greenspan merely and cryptically speaks of the "realities" of the welfare state -- permanent inflation, or repeated, engineered credit booms.

• Report this Comment On December 15, 2009, at 3:22 PM, globalsailor wrote:

  In a weak pathetic country, you need a strong government to keep the economy going. However in America, we're too rich to have the government intervene. Let the economy go down when it's grown too quickly. It will pop up even stronger.

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