The Silver Lining of Financial Bubbles and Crashes

The Silver Lining of Financial Bubbles and Crashes After Every Financial Bubble Pops the Rationalists and Re-rationalists Appear Just as the Panic Mongers Appear as the Financial Bubble Over Extends It's Limits. Capitalism Has the Natural Ability to Correct It's Imbalances Automatically Lex Loeb Contributor Network . Every time the markets crash or the banks go bush in a financial panic the worst gets recorded by historians while most of the good that results is ignored. Free Markets not only have self correcting abilities they tend to be doing positive good even at their ugliest moments. Most financial panics crashes and failures automatically result in economic redistribution without any government tyranny required. Many historic financial dislocations exclusively tend to harm the rich and the privileged more than any other segments of society and the fallout can and does prove to be beneficial to others who are not party to the losses. Little is written in history of the beneficiaries of the chaotic coll ape of the south seas bubble or the tulip craze. Just as there were losers there were also winner. A lot of the philosophy of too big to fail and government resolution after modern day financial catastrophes is about keeping the privileged in power even after they prove themselves inadequate. Benefits of the 1929 crash and bank failures however seem to be lacking examples but that was a more catastrophic crash than many with financial failures that proceed the US in Europe and government intent on fixing the problem with higher taxes and protectionism. Still the Great Depression did net many positive winners. In the US, Joseph Kennedy, a short seller came out of the panic and depression more than whole as one example. In Europe the financial collapse was a boon to various political powers and fascist leaders unfortunately. Capitalism proved itself resilient during the depression because stock market prices did collapse as did real estate prices but every thing eventually did restore itself and purchasing power with unencumbered assets (without debt) did adjust for deflation in terms of purchasing power just as they can with inflation. That is a simplified view but the best financial crashes panics and collapses were yet to come after the 1930s. One of the worst crashes was the market depression due to inflation between 1960 and 1980 when Stock prices seemed to be going up when they were really loosing massive purchasing power due to inflation on a compound basis. Politicians all took credit for rising stock market prices during those not so wonderful period so stock market growth and the public was generally too dumb to know they were being fooled. The incredible rise of Warren Buffet as one of the world's richest business men was grounded in knowing that the stock market was depressed in value when most people had the illusion that it was rising in value because of inflation and seemingly high interest rates that somehow seemed to counter act the inflationary surge. Even that slow motion inflation driven market crash had winners when history seems to record mostly losers. Economic equilibrium is one of the great fictions of fantasy writers and philosophers. The fact of the mater is that economic progress is achieved not because there is equilibrium but because of percisely the opposite. Relative scarce resources is always what drives economic activity. People work hard to achieve the means of either getting their share of these scarce resources or are motivated to try and increase the supply of these resources because the scarcity creates a profit potential. People who question the love affair with capitalism usually don't question their own right to hoard resources for their own benefit and they don't usually take food out of their own mouth's and share it because intuitively they know that if they truly shared it with everyone having needs they themselves would starve to death. Capitalism always has had it's cycles because scarce resources in demand attract much interest in the profit motive of adding to the supply because of the benefits of having competition for scarce available supplies. If everyone had more than enough resources and total leisure time to enjoy the wealth the economy would immediately stop in its tracks and production of the resources might not still be guaranteed. Low prices instantly signal the marketplace that is is not worth producing more supply. It is possible to have high demand and low prices if there is more than adequate production. The reason why health care costs , as one example are high is because of relative scarcity of supply but only verses existing demand. It is hard for people to see the supply demand attributes of health care because the health care system seems to be a place of secret pricing mechanisms and systems that seem incomprehensible. Below all of the things that seem confusing is just basic supply verses demand dynamics and relative scarcity. Scarcity in the health care field is what has created most of the opportunities there and most of the technological improvements over the years. Incentives drive all of the medical goods and services companies, the insurance companies and even the hospitals themselves. The same dynamics that gave Europeans powers the incentives to build ships and raid the new world American Continent for Gold are an imbalance not a state of equilibrium that created the most powerful economies of that time in Europe. So much Gold was brought back to Spain from The Americas that there was an actual gold inflation where gold lost value because there was no scarcity of the stuff even as the British were stealing gold in transit from the Spanish. Spain and Portugal had tremendous economic boom times in the beginning that eventually went bust. Spain employed capitalism but it really was not a capitalist country just a capitalist monarchy that blew most of their gold bonanza on non productive assets and on unsustainable war spending. Spain's gold harvest was plowed into an economy of faith and not into the emerging capitalist industrial revolution. Spain left a heavy implant on the world though that cannot be discounted with most of Latin America and parts of Asia permanently given some Spanish culture. The Spanish Empire did persist into the future because of the Spanish language ties to the colonies. The Spanish bubble did lead to overlooked benefits. There other bubbles that are much more dubious like the South Seas bubble and the Famous Tulip craze. It can be argued that these both left some benefits after their catastrophic collapse. In The South Seas bubble the benefits were in part a more general popularization of the stock market as a concept in practice. Not everyone lost money in the South Seas Bubble. Some got out and took advantage of the resulting panic. The tulip craze left a viable ornamental bulb growing industry that lasts to this day and there too some people did emerge from the panic better off than where they started. The losers of course made the biggest noise and always do after they have undermined their own finances and look for scapegoats to blame. This is not to say that the South Seas Bubble nor the Tulip Craze were great moments in history worthy of repeating but it is to say that that sort of history is forever likely to repeat itself generation after generation just because equilibrium will not get an economy moving it is the imbalances that do. The same thing is true with the weather. The air masses only move around the earth from high pressure areas to low pressure areas because of the gradient imbalances and not because the air is the same temperature and pressure everywhere on the surface of the earth. If it were the air would stand still and there would be no wind and not even breezes. It is hard to think of the benefits of the great stock market crash and banking panic that brought on the great depression in the USA but there might have been benefits had the government rationalists not taken over after the crash. Rationalists have the delusion that they have vast powers to outwit market forces and that they can set one dial to achieve necessary supply and another dial to be sure it automatically matches demand percisely. They keep trying this and every time they fail. They try going to the extreme of rationing as rationalization for price controls and the results usually end badly. The FDR rationalists probably prolonged the depression to ten years when the economy would have flipped back more quickly on its own. So goes one theory but a theory never tested in the 1930s. It was however tested in other economies like the Asian financial panic and crisis a few years ago that looked like the end of many Asian economies that all bounced back with none getting dragged down ten years. The Japanese bust however was rationalized and it turned into a 15 year extended drawn out recession that is still in the process of ending. The whole problem with the Japanese crash was great success in gaining wealth but too much wealth being spent on real estate assets that were too scarce driving up prices to unsustainable levels because real estate has to be owned by people in society who can afford it. The era of the million dollar Japanese 500 squire foot home was an era of great foolishness much the same as the so called "sub prime mortgage Mess" in the USA a few years later. It all boiled down to people buying homes and real estate at prices they could not afford to continue to pay to retain ownership of over the long term. Speculation is a normal part of capitalism because it is the incentivization of imbalances in the economy opportunities. Speculators take risks, big financial risks betting they can re-sell properties they cannot really afford to other who can and we get a greater fool theory dynamic working it's way though the entire economy especially when many home owners join the game and push up prices beyond reasonable affordable for the average people meant to own those homes. The housing bubble hysteria and crash was a market crying for help signal if ever there was one. High unfordable prices on common things is a warning sign. This kind of warning sign does not however say when a financial crash will come or at what level of increasingly high prices. Speculators who take big risks like this certainly deserve to be punished by the market everyone agrees but the confusion comes in when the sentimentality of home ownership and loosing home ownership comes in. Then again most of the people with sub prime mortgages or any mortgage they cant really afford to pay, for any reason, are really never owners at all with zero to no money down loans they were just essentially renters of borrowed money as opposed to just renters of the homes they were living in as owners. The Housing crash was a breath of fresh air. Not as you still hear politicians talk about it. They are all still promising pie in the sky something for nothing and high over priced homes being affordable because of special low interest rates. They wonder why there are too many repossessed homes and building piling up in government ownership not being able to rationalize the fact ,even as rationalists, that the market has automatically made quality new homes available at reasonable prices with out any government involvement and at no necessary government cost. The government thinks it can have high home prices to save darling banks that would otherwise fail and they want buyers for homes that should be severely discounted to market to pay prices they can't afford at special low interest rates. The same thugs in Congress who obviously have no respect for the power of free Enterprise capitalism are making crazy new laws to tax banks for their own virtual future self destruction while also giving them interest free capital which looks like the seeds for the next real estate banking bubble getting sewn into the ground. The real estate market correction made better new housing stock available at affordable prices which is a great benefit to society contrary to the way most economic media reporters seem to understand what has happened. People who lost money in real estate essentially subsidized cheap housing along with the banks that loaned them money for millions of people . Instead of treating this as a gift to society the banks are demonized as are the real estate borrowers. The market produced inexpensive quality homes and put them on the market, after the crash , at subsidized by the crash, prices. That benefits consumers and is real consumerism. That is just the last big financial collapse whose good side is ignored by most people. The Dot Com bubble was enormous and it's failure was spectacular and could be predicted by the excesses just not predicted on the basis of timing it. People miss the magic of what capitalism did with the dot com bubble because they just remember the stock market losses. The big picture is different. The dot com bubble lead to the biggest global industrial revolution in world history and perhaps a new kind of globalization itself. The net result was the Internet and it's successful commercialization and expansion to all ends of the earth. This was perhaps an "unintended baneful consequence" of the dot com bubble and bust. Before the bubble burst wall street firms were calculating the burn rate of capital raised by hundred of over priced dot com stocks most of which would cease existing after the crash. After a few year once the dot com bubble blew the winners in the dot com bubble times were busy piecing together all the broken pieces and putting them back together. The huge amount of capital invested deemed to be wasted in the dot com bubble left a lot of people better off with capital than when they started. The Dot Com bubble was one of the great benefits to economic society ever because it flooded the Internet pioneers with easy capital that allowed them to experiment. You might recall the days when the big question was would anyone every dare to actually buy something with a credit card online? Back then it seemed really risky. Today most of the world's banking industry has moved on line. Most stock market access has moved on line. There are more high volume transactions that occur online today than occur in the rest of the face to face world of direct human to human interface. The Dot Com bubble bubble bust cost a lot of people a lot of money in the short run and a lot of personal fortunes but it did create something that never existed before that continues to grow and transform the face of civilization worldwide. Had there not been a dot com bubble or a the ensuing collapse the world would probably have been worse off economically than it is today. That may seem hard to believe until you realize that the zero sum game components of the market just redistributed most of the capital elsewhere in the economy but it also set in motion a non zero sum game of exponential growth and development that continues to this day. The point being is that the coming robotics, outer space development, fusion power and bio tech bubbles that are definately on their way at some point are going to be just as dangerous for short term capital investment but much more beneficial to society and the economy than anyone can predict in the long run. The legacy of the 1920s boom left a vibrant legacy that included radio and the American suburbs and much more than that which is ignored by historians as inconsequential. The great depression was a big long speed bump that was very unfortunate. Too little credit is given to the government for deepening the great depression. Actually it was more than one government that was responsible. As earlier stated the developed European markets crashed first and protectionism and higher taxes were the mis begotten solutions on a global basis. Some of those same mistakes are once again being repeated and one has to wonder if eventually the government solutions might not really be the cause of major future problems. Already there is data suggesting that government tax hikes in the recession is hurting general re-employment and creating financial uncertainty where less government would have provided better job development opportunities otherwise. The silver lining of a financial crash is not necessarily apparent immediately when the financial instability causes havoc in society but will show up later. Government never takes credit for their mistakes as politicians are universally fair weather friends. They never mention bad weather but always take credit for the good weather as if they created it. That leads to trouble later on. After a crash the politicians go tisk tisk tisk to those who failed even though the failure was promoted by government policy that was designed to absorb all losses at no cost to participating businesses invited as insiders. The fiasco of government having created a system designed to guarantee losses is not being possibly replaced with a system that will make financial houses pay excess taxes for their own corporate undertakers insurance. The whole game is the same old just pretend government shell game all over again and of course everything is subject to re legislation later on. Too big to fail will be the same next time as this time if the government is not suicidal regardless of what the law being drawn up says now. People familiar with the process can see that the congressional committees drafting financial reform bills are 100% political and 0% actual reform. The escape hatches for the rats are being designed this time so the rats leave the ship again unscathed and the shareholders loose big time while the government still foots the bill or forces consumers to pay for the insurance in advance. The next collapse wont be the same thing all over again but entirely something new and seemingly unexpected once all over again as it always is. Housing prices fell appropriately in the sub prime crash to make homes affordable for people who buy them to rent them out to those who really can't and should not be able to afford to buy such homes. The markets tried to work out the disequilibrium in the markets in this manner for t he benefit of economic being of more of society and government completely cannot see the silver lining or if they do they certainly are not playing fair. Immediately when home prices fell there were people bidding on lower cost properties as speculators or landlords to be. That was instant resolution by the market place but government's solution was to make prices higher to save foolish banks while generating higher barriers to entry level competition for the banks that failed. Everyone saw the Federal reserve and US Treasury reaction which was to stabilize the market by keeping prices of failed real estate mortgages high by generating more home ownership instead of just letting the market thrive by allowing prices to be much more affordable for buyers. Instead of giving consumers more time to pay or tax credits to banks to lower interest rates the government only went into too big to fail mode at significant expense and then took credit for saving everyone from the next great depression that can never be proven because there is no control experiment to compare the results to what historically did seem to happen. Markets collapse and the free market takes the blame. Politicians believe that because they think they are more rational than the chaotic mind of the market that they should have the power to regulate it. Unfortunately for the politicians the markets are more honest than they are even if people like Bernie Madoff have been controlling the markets. Markets have the tendency to chew up the Bernie Madoff and send them down their alimentary canals and out the market anus. This is percisely what happened to Madoff because there is no evidence that government being more rational evicted Madoff. Not it was the market failure that stopped Madoff and others like him and save hundreds or thousand of new potential victims from these people. The market saved people from Madoff not the regulators and if you don't believe it read up on it. At the same time the market rationalists and politicians have done nothing other than protect a whole new set of Madoff like characters and some failed bankers who should be nowhere near banks in the future. The Obama administration seems in a just pretend world where they can pick and chose tomorrows winners and losers from among the existing losers. Try figuring that out as better than what a free market can do. The rationalizing of real estate prices goes on and it seems even more absurd since government has a terrible record of realizing profits on surplus assets which most of the time they practically give away especially to insiders who get first dibs on the freebies. When did we ever see a government actually make money on investments and not lose money and then go back again to raise taxes? So why do people trust people who are telling them that they are more rational than the free market and the forces of the free market? It is impossible to understand this given the statistics w have at hand. The market has been more rational than big government-over 99% of the time and the other 1 percent eventually over time the market is right too and the just pretend rationalizing government wrong. The stock market tend to have more stocks that regularly raise dividends significantly to stock holders than you ever find governments that pay dividends to lower taxes! That is where the statistics definately favor the free market and free market forces. Where has government proven itself as rational as any business that is an income producing entity? It is not that they have not tried. The socialist models have all tried to move the means of production and of course the cash flow to government ownership and virtually none have succeeded over the long term. The only positive cash flow produced by government has been in hydro electric dam building projects but those cash flows don't tend to benefit taxpayers but others with special interests associations to the hydro-electric programs. When government projects crash which they often do the silver lining all seems to benefit special interests again and not the public as a whole. Big government rationalized social programs lie in ruin one collapsed on top of the next. Public housing programs ended worse than sub prime mortgages did. The war on drugs is a continuing financial fiasco with international repercussions from Afghanistan to Mexico. Government Ethanol programs are making basic food unnecessarily expensive while using more gas and diesel fuel to produce ethanol with fewer BTUs than could have just been spent with the gas and oil that goes into it's production. Failure does not mater to the government but they have all the solutions for the financial markets! The silver lining of bank crashes is possibly more than the zero sum game loses or gains it can be the capitalization in a sudden crazed frenzy of a future geometric progression. The housing bubble netted society a lot of up dated new housing stock when needed and it remains after the crash subsided by bank losses to consumers which is ordinarily a kind of a benefit to consumers when the media slat about the great depression is ignored. The dot com bubble bust was one of the most productive financial crashes in world history that cannot be discounted as a fiasco without a very lustrous silver lining. .