It's fun to read posts that deny we're in the bubble, or that the market has turned. It's one thing to argue against the #s. It's another thing to not have the understanding of financial markets and basic human behavior, and to not be able to see it in this obvious current situation
Here's a recap with some commentary:
Kindleberger's book provides massive historical evidence to support his assessment of the boom-bust nature of financial markets.
Basically,speculative excesses,financed in large part by margin account loans (mortgages) and easy bank credit (the Fed),leads to a pattern where the debt load of many market participants is overleveraged(no money down interest only loans).
Like the straw that breaks the camel's back,all it takes is an exogenous(or endogenous) shock to pop the speculative bubble (rising interest rates).
The value of the underlying assets of the overleveraged market participants collapses (here we go).
These individuals go bankrupt,causing a chain reaction (watch the panic as everyone tries to get out at once - see it in listing #s) as other participants are impacted by the bankruptcies and up bankrupt themselves.
The problem here is not necessarily irrational decision makers,but rational decision makers who lack sufficient relevant information (because of corrupt appraisers, biased realtors, financial press, and even greenspan's lies to apply the standard neoclassical decision techniques.
These decision makers KNOW that they don't know. They then decide to follow those whom they believe are better informed (if everyone is making money in real estate - so can I - it's easy!)
This leads to crowd,herd,and cascade effects that both creates the bubble and the crash (it's so obvious folks - the only question is when, not if).
November 26, 2005
Posted by blogger at 11/26/2005