It’s an eternal story of greed and loss:
By the middle of the first decade of the twenty-first century, the psychology of the boom was well established. After multiple years of strong growth and rising asset values, risks seem to diminish in financial markets. The gambler has thrown the dice a number of times, and each time has won, while the investors who have remained cautious are less successful and fall from favour. Those with money to lend or invest as equity in speculative ventures watch the gambler throw and win, and begin to think that he has skills beyond the ordinary human. The gambler who borrows heavily for speculative investment, the lender who accepts high margins for disproportionate risk, and others who suspend the normal judgements of prudence appear on the rich lists. They become responsible for investing higher proportions of the world’s capital.
The speculators become popular heroes and more influential in political systems. Those in leadership positions who take seriously their responsibilities for imposing constraints on the use by investors of other people’s money are pushed to the margins of public life. Some of the prudent, including regulators, also come to believe that risk is not what it used to be, and are less confident of their old positions. If they make this transformation in perception early enough, they retain their influence and may even become maestros of a new financial order.
This is the eternal story of the bubble in capitalist economies. Yale behavioural economist Robert Shiller tells us that this process is a reflection of human nature; it’s a reflexive response, hard-wired into human beings, part of their social make-up. To this we can add the observations of economist Robert Aliber of the University of Chicago, and Massachusetts Institute of Technology economic historian Charles Kindleberger in the updated fifth edition of the latter’s classic history Manias, Panics, and Crashes. They observe that since the 1970s, the world has seen a greater frequency and amplitude of financial manias, and they attribute the increasing instability to greater linkages of trade, finance and investment.
When more and more of the world is linked, the variations across countries develop closer connections and come to reinforce each other. The liberalisation of financial transactions seems to have left more scope for the herd to gain momentum in a boom, as well as in a panic, when the herd changes its course. Aliber and Kindleberger call this the dark side of globalisation.
Professor Ross Garnaut and I wrote this as the story of the global housing bubble in The Great Crash of 2008. It’s kind of weird (and a little depressing) to see it playing exactly to script again just ten years later. Not to mention ironic that it is coming from an anarchistic impulse derived from the last bubble.
