Financial Bubbles Explained

[snousle]

This article in the Atlantic explains, at last, something I have had a sense of but couldn't articulate myself. Here, Henry Blodget explains why Wall Street investors and others acted, on an individual level, in an entirely rational way in creating both the tech and housing bubbles. The key part of his account involves the tension between business risk and investment risk, which are not the same thing. As he says, being bearish and wrong is at least as risky as being bullish and wrong. The pressure to go out on a limb and take on unsustainable risk in a rising market is, on a collective level, impossible for institutions to overcome.

This article is very satisfying because it does not rely on calling anyone "stupid". (Doing so, IMHO, is to forfeit real understanding in favor of self-serving judgmentalism.) Instead it explores the motivations and uncertainties of everyone involved and shows that they all had good reasons for acting as they did. His conclusion is that bubbles are not anomalies, but are instead a permanent part of the financial landscape that we should expect to see every few decades.

This is the best single article I've read on the subject so far.

Comments

[kevynjacobs.livejournal.com]

Very thought-provoking.

His assertion that economic bubbles have always been with us, and will always be with us, is one of the best arguments I have heard for NOT privatizing vital services -- such as retirement income (like Social Security), pensions, and well as health care -- into free market investments. Those who argue in favour of such privatizations clearly do not recognize that things don't always go up.

[snousle.livejournal.com]

Privatizing social security is the worst idea ever - it would end up being pure crony capitalism. Can you imagine the corruption invited by a mandatory trillion-dollar infusion into the private sector by people who have no idea what to do with it?