Human nature is to be forever blowing bubbles
IT seems incredible but barely two years into the greatest depression/recession/downturn/hiccup (take your pick) the world has suffered since the 1930s, we’re already talking about bubbles again.
Experts fear the 30 per cent surge in the local stock market since March – mirroring a similar spike on Wall Street – is building into a premature and unsustainable bubble crying out to be pricked.
Reserve Bank boss Glenn Stevens reckons the housing market, fuelled by record low interest rates and the government’s first-home owners giveaway, is looking dangerously like a bubble that could need a dose of higher interest rates to deflate.
And, if you look further afield, there’s even talk about a bubble in the Chinese market for new stock listings. (Shares in China State Construction Corp, the biggest float anywhere in the world since Visa early last year, jumped 60 per cent when they debuted in Shanghai this week.)
What does all this tell us? That human nature – particularly its capacity for greed – will not be suppressed by this little economic wobble. Like every other boom and bust in history, we’ll learn nothing from this one and, inevitably, repeat the same mistakes – of chasing the latest hot commodity, of buying high and, in tears, selling low.
Kevin Rudd, in his steamy 6000-word treatise on the GFC, says “the boom-and-bust economic cycle of the past decade has been an unavoidable consequence of a decade of neo-liberal free market fundamentalism that reinforced a culture of corporate greed and excess in the financial sector”. As part of his solution, he argues for “stronger financial regulation”, particularly over the financial strength of banks and the monitoring of “system-wide risks”.
It may sound defeatist, but regulate all your like, and human nature will still find a way to blow bubbles.
The financial markets may have mellowed, with CDOs, CDFs and the like now viewed with extreme suspicion and subject to extra oversight from regulators closing the gate behind the bolting horse. But the investment bankers and brokers who survived the great cull, often thanks to government support, are already finding new ways and new markets to milk the innocent and make money.
Look at the rampers on the Chinese stock market, or the speculators making merry in the (relatively unregulated) oil market. Only this week, Deutsche Bank said profits rose 62 per cent in one quarter, largely through trading the bonds issued by desperate and debt-laden governments to drag the world out of this financial mess.
Morgan Stanley co-president James Gorman recently told journalist Alan Kohler he reckoned the personal greed and excess that contributed to the global financial crisis was “extremely unlikely” to be repeated. The financial world, he suggested, had learned a lesson. With the greatest respect to the highest ranking Australian on Wall Street, an eminently sensible man, that’s nonsense. It might take a little time but the record salaries set on Wall Street in the past few years will be broken.
Local fund manager Peter Morgan was perhaps closer to the mark last month when he offered Rudd a little free advice on the government’s unqualified support for the banking sector. “Right at this moment the smartest guys in the room are again establishing get-rich profit schemes while you knuckleheads (on our behalf) door stop potential losses and these white collar bullies get obscenely rewarded for any gains magnified by the use of leverage,” he wrote in a letter to The Australian Financial Review.
It wasn’t that long ago that Gordon Brown was claiming credit for ridding Britain of its “boom-bust” economic cycle. (Seems almost funny now, doesn’t it?) But there have been booms and busts for centuries – going back to the Dutch tulip craze in the 17th century. They’ll always be with us. And there will always be opportunists ready to make a quick buck at others’ expense.
The worrying trend is that the busts are coming more frequently. There was barely five years between the dotcom crash, which now appears as a mere blip on the markets, and the start of the sub-prime meltdown that led us into the GFC. Are memories really that short?
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