inside asset bubbles: the rationality of speculation (exec brief)

I wrote a paper on speculative asset bubbles, having loads of fun doing it. Although I am aware of the brutal reality that not everyone may full understand the dialectic/specific vernacular, this should not prevent discussion.

Caveats aside, here is the introduction:

“Chain letters, bubbles, pyramid schemes, Ponzi finance, and manias are somewhat overlapping terms. The generic term is non-sustainable patterns of financial behaviour, in that asset prices today are not consistent with asset prices at distant future dates.” [emphasis added, Kindleberger, 2005, pg. 11]

Charles Kindleberger proposes the above definition of a ‘bubble,’ in his book, Manias, Panics and Crashes: A History of Financial Crises, where he argues that the “cycle of manias and panics results from the pro-cyclical changes in the supply of credit; the credit supply increases, relatively rapidly in good times, and then when economic growth slackens, the rate of growth of credit has often declined sharply.” It is more than obvious that the supply of credit is at the heart of his proposed framework on how to interpret financial “bubbles.” However, there is one caveat: in typical pro-Enlightenment fashion, Kindleberger’s definition of “non-sustainable patterns of financial behaviour,” implies a problem in need of a solution and says nothing about the (historical) contexts in which these bubbles form, who the actors were and what positions of power they held in society and whether these speculative patterns themselves were intentional or unintentional. For Kindleberger, borrowing one of Alan Greenspan’s terms, “irrational exuberance” is the final destination, a pathology of human cognition and behaviour, which must be contained, acted upon, and solved. However, containment strategies and state administered medicine, in the form of (dis)incentives, is often at odds with a more pragmatic reality that government officials can and often do (and have in the past), either surreptitiously or otherwise, actively participate in speculative undertakings for personal gain.

Consider the following. ‘Contemporary bubbles are distant cousins of past financial behaviour.’ Although almost a cliché in the modern world, this is a gross misunderstanding; one that Peter Garber unpacks in his monograph entitled Famous First Bubbles. The current paradigm, that past “irrational exuberance” and “frenzied speculation” is but part of a rudimentary, archaic and unsophisticated era, Garber argues, is historically unfounded and in turn manufactured by vested interests. That the Mississippi and the South Sea bubbles have now become anecdotes of what once used to happen, but no longer possible because of the ‘safeguards of modernity,’ is proof of the extent to which vested interests have manufactured, manipulated and massaged historical fact to fit their own speculative projects.

Furthermore the opposite can be argued: that modernity is more susceptible to “non-sustainable financial behaviour” than previous pre-Enlightenment and pre-Industrial Revolution eras were. In addition, the term “bubble,” has become a placeholder of convenience. When it is desirable to frame certain market behaviour as a bubble, we (read: vested interests) do so. When it is not, ‘we’ do not. Modern methods of communication, transportation and the proverbial ‘flattening of the world,’ predispose local markets stand to attacks on behalf of speculators. International contagion is an unstoppable ‘disease.’ Regulatory financial, currency, monetary and fiscal policies, designed to forecast and subsequently prevent bubbles, are often times toothless and ineffective. However, these distinct features of modernity are exactly why, reading a trend off a chart is absolutely meaningless, when trying to understand the underlying mechanics of “non-sustainable financial behaviour.”

Concluding, I wrote:

I expected to find both convergences and divergences between the past and present. However, the similarities or convergences between the two are most striking. Modern economic instruments coupled with their modern policy directives are often only marginally better at dealing with financial ‘bubbles’ than their pre-modern counterparts. In addition to this, failing to critically engage history may grossly mislead one to believe that what may be perceived as a ‘bubble,’ was in fact the result of market fundamentals. Furthermore, the term ‘bubble’ is often appropriated or not appropriated by those individuals in whose interest it is to frame the issue one way or the other. Governments, although constantly fighting to maintain an area of unchallenged justification for interventionist and control-politics, fail miserably when public officials themselves are often tied up in corruption scandals – and more notably, actually instigate ‘bubbles’ and see to it that they are carried through.

Yes, the above is controversial. But that is the point, everything is controversial, everything is spun, framed and massaged to fit personal interests. Look for a follow up post to this.

*Non-chartists beweare!


1 Comment

Filed under asset bubbles, Banque Generale, bubbles, collusion, contagion, corporate, corruption, critical, economics, expiry, finance, france, germany, government, imperialism, irrational, John Law, liberty, market, Mississippi, neocolonialism, pathologies, philosophy, Policy, politics, postcolonialism, property, rational, regulatioin, risk, South Sea, sovereignty, stock market, symbols, Tulipmania, Uncategorized, United States, wealth

One response to “inside asset bubbles: the rationality of speculation (exec brief)

  1. Wanda

    Excellent site – do keep up the good work.k

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