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August 24, 2009
A Few Words On Market Manias
David Warsh is giving economic advice to the Queen of England on how to avoid bubbles and financial panics in the future. The disarming question you asked when you visited the London School of Economics last autumn - why did nobody notice that the credit crunch was on its way? - produced a thoughtful letter from the various authorities who gathered recently at the British Academy to ponder and draft a measured answer.So what is my take? The short answer is that high profits are to blame. Let me explain. It all starts with "expected future value" or "expected future profits". And it doesn't require a central bank pumping the money supply. A high rate of profit that releases sufficient capital will suffice. We have had a 30 year run of that with microprocessor/electronics technology. So where did we go wrong? Not enough investment in research. i.e. not enough good new ideas to absorb the generated capital. Compared to the losses we are currently sustaining research is very cheap. The difficulty is that it requires a LOT of brainpower. And there is never enough to go around. And way too much is going into banking and marketing (it is where the money is) and not enough into sciences and engineering. In other words - we don't apply the right valuation to our overall situation. Hence - financial bubbles vs technological bubbles. Financial bubbles are looting. Technological bubbles are foundations for the future (the dot com bust left us with infrastructure - which when marked to market led to the current communications boom). Here are a few books on the subject that might be of some use: Knowledge and the Wealth of Nations: A Story of Economic Discovery by David Warsh Manias, Panics, and Crashes: A History of Financial Crises Here is a 150 year old classic on the subject: Memoirs of Extraordinary Popular Delusions and the Madness of Crowds And here is one due out on September 30th: This Time is Different: Eight Centuries of Financial Folly Cross Posted at Power and Control posted by Simon on 08.24.09 at 03:58 PM |
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