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Identifying and Popping Bubbles: Evidence from Experiments
On the way up, bubbles encourage excessive investment in the bubble sector. On the way down a bursting bubble can create wealth shocks, liquidity shortages, and balance-sheet death-spirals. For both of these reasons, it would be good to be able to identify and pop bubbles. Identifying bubbles isn't easy, however, because, especially when interest rates are low, prices can increase rapidly with small, rational changes in investor expectations. But the difficulty of identifying bubbles is reasonably well known. What I think may be less appreciated is that bubbles are hard to pop even when you know that they exist.
In the lab we can create artificial assets with known dividend streams and thus known fundamental values. Since Vernon Smith's classic experiments (JSTOR), we know that even in these cases efficient markets fail and bubbles are common. Bubbles occur even as uncertainty about the fundamental value diminishes (JSTOR). We also know that once a bubble starts it's difficult to stop. Circuit breakers and brokerage fees (transaction taxes), for example, don't do much to stop bubbles (see King, Smith, Williams, and Van Boening 1993, not online.) Investor education doesn't help (for example telling participants about previous bubbles doesn't help). Even increasing interest rates doesn't do much to stop a bubble already in progress and may increase volatility on net.
Futures markets (JSTOR) and short selling do tend to dampen but not eliminate bubbles, thus, there is a case for expanding futures markets in housing and making short selling easier (not harder!).
Bubbles are also less common with more experienced traders - this is one of the strongest findings. Don't get too excited about this, however, it's experience with bubbles that counts not just trading experience. I once asked Vernon, for example, how the lab evidence generalized to the larger economy. In particular, I asked whether 3 bubble experiences in the lab--the number which seems to be necessary to dampen bubbles--might translate to 3 big bubbles in the real world such as the dot com, commodity and housing bubbles (rather than to experience with your run of the mill bubble in an individual stock). He thought that this was a reasonable inference from the evidence. Thus we may not see too many big bubbles during the trading lifetime of current market participants but experience is a very costly teacher. Can we do better?
The last factor that does seem to make a difference is that bubbles liftoff and reach higher peaks when there's a lot of cash floating around. In theory, this shouldn't matter, fundamental value is fundamental value. If an asset is worth $10 in expected value then it's worth $10 whether you have $20 in your pocket or $200. But in practice bubbles are bigger when cash relative to asset value is high.
Note that the latter experiments are consistent with the Fed having a significant role in bubble inflation (a theory I have not pushed). In other words, rather than identifying and popping bubbles already on the rise, not blowing bubbles in the first place may be easier and more productive.
Posted by Alex Tabarrok on July 29, 2009 at 07:25 AM | Permalink
Comments
I think the last point is important. However, there is a constant confusion between bubbles in the sense of traders buying an asset because they think they can sell at a higher price and malinvestment/overinvestment. The latter can come about both in the Austrian theory and, I believe, in Tyler Cowen's "new" Austrian approach when the interest rate is too low. Certain risky and time-sensitive sectors will expand because there is lots of cash (credit) floating around. Then superimposed on that phenomenon can come a true bubble. I wonder how likely the latter is without the former.
Posted by: Mario Rizzo at Jul 29, 2009 7:45:19 AM
"Thus we may not see too many big bubbles during the trading lifetime of current market participants but experience is a very costly teacher."
Maybe we should drop copies of "Manias, Panics, and Crashes" from a helicopter rather than keeping short term interest rates near zero for years at a time :)
Posted by: russ sheldon at Jul 29, 2009 8:13:52 AM
Maybe classrooms should allocate some trade-able units to students and wait for a bubble to form. Afterward, the instructor explains what happened. Experience in avoiding bubbles is then gained.
Posted by: Bo at Jul 29, 2009 8:22:07 AM
All short selling does is create buyers higher. Short selling is a promise to buy the stock back in the future. Short selling may put more shares into circulation, increasing the float (by borrowing shares from insiders who can't sell, for instance), but every share sold is also a share that has to be covered. If you look at bubbles, they only pop when all the shorts have given up and covered. They fight the bubble all the way up and then put gas on the fire as they cover near the top.
Posted by: bjk at Jul 29, 2009 8:34:35 AM
Did we not have a S&L crisis in the mid 80's and a stock market crash in '87? Maybe I'm getting old, but 20 years between one of these set of "teachable moments" is not enough. More to the point, the people who are to young to remember these crashes are NOT the ones setting policy or heading investment groups. Specifically, what was it a little more than five years ago that prompted Greenspan to state essentially that real estate bubbles were not to be feared?
I personally took that statement as a reason to be very, very afraid.
Posted by: Right Wing-nut at Jul 29, 2009 8:41:42 AM
But what if some of those risky and time sensitive projects turn out to be successes? We cannot tell with any foresight how successful any project will be, so overinvestment is only an analysis that can be done in hindsight. So, do you cut off all funding (credit) or operate more like a venture capitalist, and take the entrepreneurs estimates of success, throw them out the window, and charge significant interest rates (or give away future ownership in the firm)?
Posted by: Joe at Jul 29, 2009 9:01:10 AM
An activist Fed should be feared.
The S&L crisis was a combination of events, but the biggest contributor was a Fed that pushed up interest rates (to fight inflation). S&L's had a portfolio of long term low rate mortgages when short term rates spiked. Plus a change in regulations (not really deregulation) that encouraged risk taking while promising to have the government cover bad outcomes.
One man's bubble is another man's opportunity. I thought housing prices, in some markets, were at insane levels ten years ago. But when do I, or the government, have the right to translate that feeling into action against the choices of others. If I could have easily done it, and I was willing to bet my money not just control others people money, I would have shorted the market. A future markets in housing would have helped.
I would also argue that you don't need every trader to be experienced. A relatively few very smart traders can have a disproportionate affect on the market. This is were I think behavioral economics often goes wrong. Larger, liquid markets with profit potential will attract more skilled traders then a lab experiment.
In the current crisis a smart group of people learned how to transfer risks to others at prices that did not reflect the risk that was being transferred. Some is an agency problem, some is stupidity, some is the Fed, some comes close to fraud, some is poor public policy.
But who do you want to have the power to burst bubbles? Or do you just create better markets, something that will never happen under the current government.
Posted by: DanC at Jul 29, 2009 9:37:30 AM
The cure would always be worse than the disease, I think. If greed has led you to buy a condo that can't be rented at positive cash flow, or a no-revenue tech stock with a $10B market cap and a triple digit P/E, or a tulip bulb, beanie baby, or cabbage patch doll, then no tax or fee or common sense warning would have stopped you.
The best thing we can do about bubbles is make sure that on the way down, we don't throw out the rule book and hand the public treasury over to the greedy fools.
Posted by: David at Jul 29, 2009 9:47:25 AM
Bubbles form when the central bank expands the money supply faster than the natural growth of the economy can absorb it. What a wonderfully Austrian insight!
Posted by: Anthony at Jul 29, 2009 9:57:23 AM
If my past experience with the tech bubble is any guide, I don't think previous bubble experience is going to help. You may well recognize that you're in another bubble, but unless you're responsible to no-one, if you avoid the bubble, you're going to get yourself fired for losing out on potential profits long before the bubble crashes.
(You don't get fired for losing your shirt if everyone else lost theirs as well.)
Posted by: Tom West at Jul 29, 2009 10:03:11 AM
Did you consider this plan?
http://www.dallasfed.org/research/ei/ei0501.html
In his book 100% Money, Fisher begins by setting himself the following small task:
Designed to keep checking banks 100% liquid; to prevent inflation and deflation; largely to cure or prevent depressions; and to wipe out much of the National Debt.
In this book, produced during the middle of the Great Depression, Fisher endorsed the so-called Chicago Plan put forward by leading economists at the University of Chicago. The plan included 100 percent bank reserves, and Fisher endorsed it because he believed the system in place before 1935 had been far too unstable. He writes here about the 1920s but could just as well be predicting the late 1990s:
The over-indebtedness hitherto presupposed must have had its starters. Over-indebtedness may be started by many causes, of which the most common appears to be new opportunities to invest at a big prospective profit, as compared with ordinary profits and interest. Such new opportunities occur through new inventions, new industries, development of new resources, opening of new lands or new markets. When the rate of profit is expected to be far greater than the rate of interest, we have the chief cause of over-borrowing. When an investor thinks he can make over 100 per cent per annum by borrowing at 6 per cent, he will be tempted to borrow, and to invest or speculate with borrowed money. This was a prime cause leading to the over-indebtedness of 1929. Inventions and technological improvements created wonderful investment opportunities, and so caused big debts....
When the starter consists of new opportunities to make unusually profitable investments, the bubble of debt, especially bank loans, tends to be blown bigger and faster than when the starter is some great misfortune, like an earthquake causing merely non-productive debts....
The public psychology of going into debt for gain passes through at least four more or less distinct phases: (a) the lure of big prospective profits in the form of dividends, i.e. income in the future; (b) the hope of selling at a profit, and realizing a capital gain in the immediate future; (c) the vogue of reckless promotions, taking advantage of the habituation of the public to great expectations; (d) the development of downright fraud, imposing on a public which had grown credulous and gullible.
When it is too late, the dupes discover scandals like the Hatry and Kreuger scandals. At least one book has been written to prove that crises are due to frauds of clever promoters. But these frauds could seldom, if ever, have become so great without the original starters of genuine opportunities to invest lucratively. There is probably always a very real basis for the “new era” psychology before it runs away with its victims.
—100% Money, 130–32 (original emphasis)"
Posted by: Don the libertarian Democrat at Jul 29, 2009 10:03:18 AM
During my undergraduate days at the University of Arizona, I had the opportunity to participate in a bubble market experiment in the school's Economic Science Laboratory. That single 30 minute experiment gave me more insight into investor psychology and market behavior than anything I ever came across in an undergraduate finance text. Whether it had the same effect on my classmates I'm not so sure.
Posted by: M at Jul 29, 2009 10:13:04 AM
I would add, to the Austrian comments, that the effects of an increased money supply are more pronounced than under experimental conditions, because in the real world, it often is "other people's money". The "trader's option", as well as other agency costs, make it easier for a surfeit of capital to prompt a bubble. This works in both directions: (1) asymmetric incentives make it more likely that a trader makes a risky, negative expected value bet, and (2) the "limits of arbitrage" and the timeframes involved make it likely that the short-sellers working against the bubble either get fired or blow up prior to the bubble bursting. (Witness the whistleblowers at Lehman who were fired in 2004-05 for attempting to rein in the risk taking.)
Bottom line: agency costs in financial markets are far, far more important than most economists think.
Posted by: Sunset Shazz at Jul 29, 2009 10:26:06 AM
James Hamilton seems to think that oil shocks lead to recessions. So might they not prick bubbles as well? Could a tax on oil be used to such effect?
http://www.econbrowser.com/archives/2009/04/consequences_of.html
"...the evidence to me is persuasive that, had there been no oil shock, we would have described the U.S. economy in 2007:Q4-2008:Q3 as growing slowly, but not in a recession."
Posted by: Brian at Jul 29, 2009 10:40:53 AM
I think these are all good points to consider. The underlying causes of any bubble are always easy to see in retrospect. What one needs is a good rule of thumb that flashes a yellow caution light.
Mine is simple. Whenever you see the phrase "this time it's different" be very afraid. The corollary is when the financial community proposes complicated and oftentimes contradictory reasons why "this time it's different", pay down debt and go to cash.
I think Greenspan, for all his kudos, is a fool. Fed officials should always be "conservative" and cautious. They should act like "bankers" and view every enthusiasm with a gimlet eye. The same man who in the 90s cautioned against "irrational exhuberance" when the DJIA was at 6500, had no concerns when the DJIA was at 14,000. Maybe he was too busy reading the entrails of the Baltic Dry Index to notice that people in California who made $60K a year were paying $400K for homes because rising appreciation would enable them to refinance in 12 months.
I'm not saying that the Fed could have prevented any of the bubbles of the past. The tools available are either too subtle or too severe. And I'm not sure I would want to live in a nation where the Fed had the "correct" powers since one should never underestimate the impact of human frailties.
Better that the Fed should concentrate on a sound currency and maintaining financial liquidity. I know those priorities are a bit soft, but at least they would have just two items to watch.
Posted by: Steve C. at Jul 29, 2009 10:57:43 AM
What's a "bubble"?
Posted by: diz at Jul 29, 2009 11:05:21 AM
I think it is a little weird that gold is not moving much given all of this economic uncertainty and the propensity for bubbles to form in our economy: http://www.bloomberg.com/apps/news?pid=20601091&sid=aGODSQTHcJzQ
Posted by: jturner at Jul 29, 2009 11:45:42 AM
diz: Quoting myself, a bubble, or rather, an economic bubble, may be said to exist whenever the price of an asset that may be freely exchanged in a well-established market first soars then plummets over a sustained period of time at rates that are decoupled from the rate of growth of the income that might be realized from owning or holding the asset.
In the case of the stock market, that would be represented by the relationship between stock prices and their underlying dividends per share.
It is possible to identify when the potential for a bubble exists in its early "inflation" phase, and in the case of the stock market, rather easy.
Going to Alex's point regarding bubbles being difficult to dissipate after forming - that would be very true - as a rational investor with the knowledge that a bubble has formed, my goal would be to ride it up as far as possible for the sake of maximizing my investment returns, an incentive shared by millions of investors that would actually contribute to its longevity.
Here, I would protect myself from the potential of the bubble popping by setting a series of progressively higher stop loss orders well below the current trading level of the market as prices continue rising, which would only be tripped if the bubble finally pops. In doing that, I'll have locked in much of the gain generated by the bubble.
So long as I might expect the collapsing phase to continue, I might well take a short position. That in turn would reinforce the rapid decline in stock prices. I would return to a long position when evidence confirms that the relationship between stock prices and their underlying dividends per share have re-coupled.
Posted by: Ironman at Jul 29, 2009 12:23:48 PM
My understanding is that the stakes in Vernon Smith's experiments are small, much smaller for instance than in a stock or housing bubble. Normal, risk-averse people can therefore get a kick from gambling in the lab, but are less likely to do it when real money is engaged. Do we know any empirical test of this idea?
Monetary expansion does, however, create large bubbles. A real bubble, with significant macroeconomic consequences, where real money was lost by many people, is a failure of expectations coordination on a large scale. But is there any example where the failure was NOT caused by monetary expansion?
Posted by: Gu Si Fang at Jul 29, 2009 12:46:44 PM
Is anyone besides Fama avoiding the word (and concept of) bubble?
Right now we're saying (in hindsight) that housing was a bubble because of the current excessive decline in prices. But the best measure for that decline, the Case Shiller, includes distressed sales (as I understand it). Where a FSBO home might sit on the market for months, with the owner waiting for the right buyer, a foreclosure sale by a bank (as I understand it - experience anyone?) is expedited, and thus can't command the highest price. In fact, the prices seem to be reduced excessively because the bank prefers the loss to managing real estate (again, anecdotally understood). Is it reasonable to include these in a down swing?
There's also another issue with the Case Shiller: a home which was flipped in one year has more weight in the index than a home which was held for ten years (an attempt to account for renovations). That makes a little sense in an upswing, but
it theoretically would seem to exaggerate a downturn. It is the short-held homes which are most likely going into foreclosure. The longer held homes, with perhaps owners with more equity, can wait to command their asking price (higher price?), yet their selling price is reduced in the index.
What's more: if we don't have an explicit, technical definition of a bubble (what rate of decline? what is the value of a home - is it hedonic, or construction?), then how can we claim we were in one?
Posted by: tg at Jul 29, 2009 12:48:01 PM
This is an excellent summary of some key results in this area. I am working on some experimental design right now as part of a behavioural regulation proposal.
In the meantime this whole question has been buzzing around the blogs for the last couple of weeks. Baseline Scenario had a writeup last week and there are a couple of other behavioural finance conversations popping up (e.g. Thaler and Posner's debate this week). Some related links:
http://www.knowingandmaking.com/2009/07/buzz-about-behavioural-finance.html
Posted by: Leigh Caldwell at Jul 29, 2009 1:08:19 PM
the entire human race is a bubble, but that's not going to be popped.
bubbles are a game of chicken, no one wants to lose their wealth so no one pops the bubble.
Posted by: anony at Jul 29, 2009 1:15:12 PM
john ashbery on bubbles:
"it means that whole tribes of seekers of phenomena who mattered very much to themselves have gone up in smoke in a few seconds, with less fuss than a shooting star "
Posted by: babar at Jul 29, 2009 1:20:43 PM
tg, I don't know how much it helps to have an ex post facto defintion of bubble, since the goal is to identify them before they pop. Because bubbles can involve different asset classes, probably no one defintion will suffice. And of course much of what might be considered evidence is subjective.
My contenders would be:
For assets that produce income, cap rates that are negative or much less than treasury yield. This was clearly in evidence during the housing bubble.
For non-income producing assets, the absence of a well established formal trading market and the (mis)use of eBay or Craigslist should be a red flag.
Other red flags are ahistoric rates of appreciation and attempts by pundits to rationalize ("new paradigm"), rapid entry or shift of the young and inexperienced into related occupations ("dot-commers, house flippers"), and promotion of new or previously dormant derivative products ("home price options, the VIX").
And finally, my number one sell everything and run away trigger would be when NYC starts talking about replacing Penn Station or building that 2nd Ave subway.
Posted by: David at Jul 29, 2009 1:27:48 PM
Bubbles pop themselves. Attempts to forcibly pop bubbles only end up wreaking the market.
Posted by: Doc Merlin at Jul 29, 2009 1:37:33 PM
Tom West makes a good point: if you are a fund manager in charge of other people's money, you often have to go along with a bubble, whether you like it or not.
If you go prematurely contrarian, you might make 5% in a quarter when everyone else made 15%, and then your investors transfer all their money out of your fund and your boss fires you. And if you have a narrow mandate to buy tech stocks and investor money is pouring in, you need to put that money to work even if there is nothing really worth buying at current prices... which only exacerbates and extends the bubble during the final "melt-up" phase.
An individual investor armed with patience and answering only to himself can often do better than professionals, because he is free of such constraints. (Or "she"... but face it, most speculators are guys).
One thing about bubbles is that they always last longer than you would have believed possible and then they pop faster than you would have believed possible. You can make nice money on the way up if you aren't greedy and you make sure to get out "too soon", and you can make nice money after things have cratered and completely overshot on the downside. Or so, uh, I'm told.
Posted by: anonymous at Jul 29, 2009 2:43:39 PM
Any definition of bubble that is not ex post will almost certainly contain the implication that "the true and correct value of something has diverged wildly from what people are currently paying fo it". This gives me some discomfort.
Posted by: diz at Jul 29, 2009 2:52:08 PM
By the way, it will be very interesting to see if blogging affects bubbles. Blogging provides an unprecedented opportunity for wide dissemination of information that was not exactly secret or confidential per se but nevertheless for most practical purposes could only be had by working with or doing lunch with people in the know (and living in the same city).
Economics blogging only came into its own at the tail end of the housing bubble. It will be interesting to go through a complete bubble cycle in the age of blogs. I suspect it won't make much difference though: most people are far too time-constrained to drink from the firehose of information.
It is not that hard to identify a bubble, by the way. I confidently assert that anyone buying a 30-year US Treasury bond today and holding it to maturity will have a very poor outcome. Efficient market hypothesis diehards, I dare you to put your money where your mouth is.
Posted by: anonymous at Jul 29, 2009 2:59:26 PM
But a definition of bubble that is ex post is like a disease that can only be diagnosed at autopsy; not worth a whole lot.
If it causes you discomfort that the EMH doesn't extend to housing I wonder why. How many arbitrage opportunities are there in housing?
Posted by: David at Jul 29, 2009 3:08:04 PM
The price and value of any asset is only what someone is willing to pay for it, only if they can find a seller at that price.
Fundamentals can help anchor the price in some manner, but if no one wants to buy the asset than is has ZERO value.
Posted by: Joe at Jul 29, 2009 3:19:44 PM
The popping of the stock bubbles in 87 and 99 were seen as disasters, but by and large, their impact was limited and other than those who thought the run up in asset prices represented something real feel that the bubble popping was a disaster.
On the other hand, the popping of the real estate bubble has been painful for a lot of reasons, but two things were absolutely clear that warned of the bubble:
1. the prices of the properties were much higher than the costs to build them; to support this, many assessments for banks were fraudulent, either because assessors who knew construction were lying, or the assessors were not properly experienced, easily confused about value, and thus chosen for their failure to recognize the disconnect between costs and price
2. the people buying the properties could not afford the mortgages without the price of property going up - for someone to pay more in mortgage payment, property taxes, and maintenance than they would pay for rent means they are buying beyond their means; to argue they were using the property as a saving vehicle and that is why they are paying more than rent means they are investing in the property and need the price to go up to get a fair return.
In Ascent of Money tonight, the stretch of housing on I-30 that was bulldozed because there were no buyers in 87, and still aren't buyer two decades later shows the mortgages were fraudulent, and people went to jail in many of the S&L failures. Now the same basic structure was in place from 1935 to 1982 for regulating mortgage lending, but clearly the view was bankers would never commit fraud, so no one looked for fraud.
Hey, no one would use illegal drugs because they are bad for you, or no one would speed because speed kills, so let's cut back on the police, because the police just get in the way of law abiding citizens, stopping them for no reason and interferring in their lives. (Let's assume we agree that speeding and illegal drugs should be illegal, even if we don't agree.) Few Republicans would agreed to slash police forces because we know people are virtuous, but when it came to banking, every banker was assumed to be a saint. Or at least very wise, knowing that only a fool would commit fraud.
So, stock market bubbles are bad, but not particularly bad. Fraudulent loan bubbles arevery bad.
Posted by: mulp at Jul 30, 2009 1:26:58 AM
Doc Merlin,
I would add a couple of qualifiers to your statement. Forcibly popping bubbles might be better than allowing for the bubble to pop itself if you can detect a bubble when it is relatively small and at a early stage. Of course you would not be able to tell what "small and at a early stage" is until you observe the whole bubble.
I do agree that trying to pop bubbles also has all sorts of high costs that have to be taken into account, the foremost being convincing the public that what was popped was a bubble and not a legitimate business opportunity.
By the way, what should we do about the next big bubble - US debt - before it pops?
Posted by: Bob at Jul 30, 2009 3:15:35 AM
to mulp
The government turned a profit on the S&L crisis, so most of those properties weren't that far off value once interest rates returned to more normal levels.
When an industry is facing massive difficulties, some in the industry will try to short cut laws. You have the arrow going the wrong way. Criminal activity did not cause the S&L crisis, some criminal activity was a result of the S&L crisis. Plus bad business decisions are not criminal.
The fact that normal lending standards were relaxed in the most recent crisis created problems. The pricing of risks was way off. People can have crazy ideas about what they want to do with their money. So what? Lenders are free to lend money to people with crazy ideas. Again so what?
People thought they had the risk priced when they were really playing a game of hot potato. But what makes the loan fraudulent?
If you want real fraudulent activity looking at the numbers the Obama administration is using to get a health care takeover.
Posted by: DanC at Jul 30, 2009 11:15:18 AM
Here's a good pop-science article about the bubble experimental literature:
http://www.theatlantic.com/doc/200812/financial-bubbles
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IANE (I am not an economist). But I have had a thought about this kind of issue for some time and I'd love to know whether it makes any sense from an economics point of view.
The fact that investing in a bubble is rational behavior at the time - even if you know it's a bubble - is obvious, frankly, and the tendency to ignore this elephant in the room has left me with a healthy skepticism of markets in general. But it does seem like it ought to be possible to design the rules of the road to make it less rational.
The goal, as I see it, should be to push market participants strongly in the direction of long term investments. Investing from minute-to-minute is all about micro-bubbles and nothing to do with correctly determining long term value. The most obvious way I can think of to do that is to make investments over the short term much less profitable than over the long term.
Transaction fees, I think, are supposed to achieve this goal but I don't think they go nearly far enough because they tend to be very small compared to the profits that can be made.
My proposal would be to adjust the capital gains tax structure to be *extremely* dependent on the length of time the asset is held. I think this is already done to some extent but my proposal is to make both the extremes more extreme. Gains on an asset held for decades would be taxed at an extremely low rate. But gains on an asset held for minutes and then sold again would be deliberately punitively high - 90% or 99% or something. Do a bunch of simulations and experiments to figure out the optimal curve in between to try to encourage a lack of bubbles.
The point would be to make it no longer rational to participate in a known bubble. If I know that widgets are overvalued but expect the value to continue to rise for a while longer then plummet when the bubble pops, I'm less likely to buy into widgets if I know that 90% of that profit will have to be given back to the government - unless I wait until after the pop to sell and don't make any money AT ALL. Better to find something else to invest in where I expect the value to grow over the long term, because the longer I can hold it the more of my gains I get to keep.
Posted by: Stuart at Aug 8, 2009 9:09:07 PM
I surfed here from must-read The Daily Dish. Sullivan's title for post quoting you was, "Can We Pop Bubbles Before They Burst?" I don't know about popping bubbles outright, but the government sure can stop promoting them with idiotic policies like reduced capital gains tax rates (reduced, on top of not being subject to FICA etc!) This was the Republicans' game, to pretend that promoting capital trades in general (instead of only focused initial capital, etc) was "good for the economy." Well, first that's a hypocritical twist on their claim that government policy shouldn't pick winners and losers - that the tax rates should just quietly take a slice of all the action and not push one way or the other. Second, the effect is ruinous as people buy and sell stocks and houses after lower tax rates attract them (in violation of the idea of "leaving the economy alone") to that worthless activity instead of "real work" etc. Third, the CG tax cuts increased the deficit.
So the Republican policy ruined our economy by first running up a deficit and encouraging speculation. Then the bursting of the bubble caused enormous damage, which was harder to fix since the debt was already run up so high. (If you say "real conservatives wouldn't have" - OK, maybe; but I'm still right as stated.)
- gadowl
Posted by: Neil B ♪ at Aug 9, 2009 11:47:45 AM
IANE (I am not an economist). But I have had a thought about this kind of issue for some time and I'd love to know whether it makes any sense from an economics point of view.
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