Bubble gum and bubble money

Frank & Ernest

There is a fundamental clash between the tenets of democracy on the one hand, and the idea peddled by many economists on the other that we can tame, avoid, or prevent financial crises. The latter is a major preoccupation of the economics cognoscenti, including in the IMF for example.

Let us accept for the moment’s argument the smart-money/dumb-money model of financial crises attributed to Kindleberger and Hyman Minsky. What this means is that the smart ones get to play with the fear and greed of the dumb ones, except that if the majority of us were in the “fooled over and over” category, then this game called capitalism should be outlawed. Why should the majority allow this to happen, if they hold the votes? Answer: They’re that dumb! But seriously, capitalism and its kissing cousin called competititon survive because they have one fundamental virtue: They allow the productive to knock out the unproductive, which is the only sure way to bring about wealth, poverty being the natural state of mankind since time began.

It is no accident that freedom of contract under democracy attends economic progress, whereas that same freedom begets bubbles and crashes.  While a well-meaning regulator, such as a central bank, might use monetary policy or financial market regulation to quell bubbles or mitigate a crisis, it cannot outdo the markets as a means of ferreting out productivity gains from innovation, etc. The modern dilemma is that a choice in favor of economic wealth also means allowing the smart money to have too much. No wonder we call economics the dismal science.

It seems then that the rule for modern economic survival is “Don’t join.” When fear or greed reigns, it is not wise to follow the crowd. But the so-called contrarians have known that forever. Or maybe, once in a while, they slip.

So, is there a lot of fear with the Greek debt crisis? Is there a lot of greed in the nascent Chinese property bubble? Is the real property sector in the Philippines heating up? You be the judge, but not the chump.

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