Financial market risk-taking is reaching excesses comparable to those that precipitated the global financial meltdown, José Viñals said
That is the “top adviser to the International Monetary Fund,” according to the story.
My point is not that I agree or disagree. My point is to note the following:
1. It is easier to picture policy makers doing something about excessive risk taking now, after they have seen what can happen, than in 2006.
2. Nothing is being done about this alleged risk-taking.
3. Therefore, it is very hard to picture policy makers doing something about excessive risk-taking in 2006.
Identifying clear and present financial danger is not as easy as it appears to be in hindsight.
Indeed, it is reason alone to doubt there is one or much of one.
It strikes me that the requisite precursor to “Targeting Bubbles” has to be a methodology to Identify Bubbles.
Consider that throughout the 2000 – 2007 period (and perhaps earlier and later) the “housing bubble” was perceived as being healthy, robust economic growth – and all the “regular” economic metrics supported that perception. Homeowners were seeing rapid appreciation in their most significant asset, local/state governments were seeing rapidly increasing property tax revenues, and the federal government was seeing healthy, robust measured GDP growth – with exceptionally low unemployment rates. Everybody was “winning” and nobody was “losing”.
But some point in time, between 2000 and 2007, the majority of that housing investment and resulting image of healthy, robust economic growth became mal-investment, and highly leveraged mal-investment at that. I’ve not seen any work by anyone that identifies when that mal-investment began, or even how to detect mal-investment.
It seems “identifying a clear and present financial danger” isn’t easy, even with the benefit of hindsight.
What concerns me is that the current and proposed regulatory regime for the financial system will do nothing more that restrict financial flows and make them more costly. And that increased cost/reduced flows will suppress valid investment supporting economic growth, as well as suppressing – but not precluding or even identifying – possible future mal-investment episodes.
One pundit, Peter Schiff, noted he could rent cheaper than buy near Silicon Valley. Real estate agents told him, he could flip the house and live for free and make money. I theorize that bubbles can be detected when people who don’t deal in the actual begin to participate in the “bigger fool” game.
Bill Drissel
Frisco TX