The Fed’s view has been that bubbles can be identified only in hindsight, and that all the central bank can do is prepare to clean up after they burst. The current crisis shows that policy is mistaken, [New York Fed Chief] Dudley said. “Asset bubbles may not be that hard to identify,” he said. “This crisis has demonstrated that the cost of waiting to clean up asset bubbles after they burst can be very high.” Dudley did not specify what tools the Fed should use. Analysts have suggested that central bankers might raise reserve requirements or amp up restrictions on margin lending.
This idea generalizes big time. All sorts of claimed inefficiencies imply enormous unexploited profit opportunities, i.e. women are underpaid or lenders are racist. The women one in particular, if the size of the unjustified wage gap is anything like what they say it is even an inefficiently run state owned enterprise should be able to make fat profits hiring nothing but women, reinvest, expand into new businesses, spin em off, and ultimately eliminate the thing.
And for a bit of shameless self promotion from the article...
To help decide whether speculators or politicians know better, Americans don't have to go any further than intrade.com, a futures market. This is one place where people place bets on what will happen not only on economic outcomes but on current political or entertainment events, such as who will win an election or an Oscar. In 2004, speculators on Intrade correctly predicted which presidential candidate would win the electoral votes of every state in that year's U.S. presidential election. In 2006, Intrade predicted who would win each and every Senate seat up for election. You would think such accuracy would earn some respect among politicians.
Jsalvati pointed out one of the most obvious objections to this in terms of asset classes. Another (speaking as an ex-regulator) is that "the best and brightest" don't tend to stick around in regulation very long as they'll typically be poached by firms in the private sector willing to pay them *much* more to do the same job.
Also, you could also run this experiment cost free by getting regulators who thought they were up to to create dummy portfolios of "bubble" assets to check there was any credibility to these claims without taking a massive speculative bet. Then you'd only be stuck with the almost insurmountable probably of separating skill from judgment, which would take a good couple of decades of data to establish. THEN, I'd say you ideas a goer.
"After all, it’s just a piece of cardboard with some ink on it. It’s value comes almost entirely from the fact that people believe it is valuable - yet there’s no particular reason why the “baseball card bubble” should burst."
I think you just don't care about baseball cards.
It would be a bubble if the value really did come almost entirely from what people thought they could sell them for, but the reason the prices stay high is because there are people who actually want the cards enough to pay those prices, in and of themselves, rather than because they can sell them to someone else. In this case, it's not a bubble -- it's just what people value those things at.
First, I don't think the current actors (investors) are centralized. Second, Robin isn't suggesting anyone gets replaced. He's suggesting we add a specialized type of investor who uses government money.
What do you mean by "broken conservation of cashflows" and how do they raise prices?
The defining characteristic of a bubble is that, someday, it pops.
There are ways to predict that something is a bubble, and they're often right. However, these methods are really bad at predicting when bubbles are going to pop - and in order to make money by shorting a bubble, you have to know when it is going to pop.
Look at this graph of the NASDAQ Composite index during the dot-com bubble.
If you were a regulator with a pile of cash in 1999, what could you have done to pop the bubble?
It sounds like you disagree with the regulators who claim they can spot bubbles. I didn’t claim they could; I said that if they could, here was an accountable way to have them use that info.Oops. Never mind.
If that would work, the market would already regulate itself and eliminate bubbles, since all traders are trying to do exactly what you want the regulators to do.
It sounds like you disagree with the regulators who claim they can spot bubbles. I didn't claim they could; I said that if they could, here was an accountable way to have them use that info.
We already HAVE a government agency consisting of the "best and brightest" at least looking at offsetting bubbles in one market - foreign exchange. That agency is the US Treasury, and its operating agent is the Federal Reserve Bank of New York. Taking positions in the FX market when the dollar is deemed to be too low or too high is of course called "intervention", is almost always done in concert with other central banks, and it has been consistently profitable since floating started. However, it is very rarely done, because we still live under a paradigm, ingrained in the Washington Consensus, that the market knows best, that intervention is bad, and that FX rates should freely float. That's why we've seen 2 1/2 huge swings in the dollar's value over the past 35 years, despite complete convergence of inflation rates and basic harmony in macroeconomic management policies.
It regulators think they know when commodity prices are too volatile, they should just buy low and sell high; if they are right they’ll reduce volatility and make a profit in the process.
In the comments, Michael F. Martin here and here and Doug S. point out very correctly why your reasoning is unsound.
When you bet against a rising bubble, you're basically betting that the prices of the underlying asset are going to fall. In other words, you won't make any money until after the bubble bursts. Even if you know for sure that a bubble exists, and, indeed, you're right that a certain asset is significantly overpriced, there's no way to make any money on that belief until other people start agreeing with you and the price drops.
It's also possible that a bubble could simply fail to burst at all; the prices could simply stabilize at a high level for non-rational reasons. For example, what's the intrinsic value of a Mickey Mantle rookie card? After all, it's just a piece of cardboard with some ink on it. It's value comes almost entirely from the fact that people believe it is valuable - yet there's no particular reason why the "baseball card bubble" should burst. What makes a canvas painted on by Picasso valuable while a flawless reproduction of the same painting is a worthless "forgery"? They both look the same when you hang them on a wall. Bits don't have Colour.
The defining characteristic of a bubble is not that asset prices are irrationally high. Lots of things are priced well above any "rational" measure of their intrinsic value, and stay that way for what might as well be forever. It's the sudden, precipitous drop in prices that makes a bubble a bubble; much like you can never be absolutely sure that something is mortal until it dies, a bubble isn't a bubble until it bursts.
This idea generalizes big time. All sorts of claimed inefficiencies imply enormous unexploited profit opportunities, i.e. women are underpaid or lenders are racist. The women one in particular, if the size of the unjustified wage gap is anything like what they say it is even an inefficiently run state owned enterprise should be able to make fat profits hiring nothing but women, reinvest, expand into new businesses, spin em off, and ultimately eliminate the thing.
Hasn't George Soros already proved that this can be done?
Robin,
The Wash. Times has a good Ed. piece today.
Here is the link...
http://www.washingtontimes....
And for a bit of shameless self promotion from the article...
To help decide whether speculators or politicians know better, Americans don't have to go any further than intrade.com, a futures market. This is one place where people place bets on what will happen not only on economic outcomes but on current political or entertainment events, such as who will win an election or an Oscar. In 2004, speculators on Intrade correctly predicted which presidential candidate would win the electoral votes of every state in that year's U.S. presidential election. In 2006, Intrade predicted who would win each and every Senate seat up for election. You would think such accuracy would earn some respect among politicians.
Cheers,
John
Jsalvati pointed out one of the most obvious objections to this in terms of asset classes. Another (speaking as an ex-regulator) is that "the best and brightest" don't tend to stick around in regulation very long as they'll typically be poached by firms in the private sector willing to pay them *much* more to do the same job.
Also, you could also run this experiment cost free by getting regulators who thought they were up to to create dummy portfolios of "bubble" assets to check there was any credibility to these claims without taking a massive speculative bet. Then you'd only be stuck with the almost insurmountable probably of separating skill from judgment, which would take a good couple of decades of data to establish. THEN, I'd say you ideas a goer.
"After all, it’s just a piece of cardboard with some ink on it. It’s value comes almost entirely from the fact that people believe it is valuable - yet there’s no particular reason why the “baseball card bubble” should burst."
I think you just don't care about baseball cards.
It would be a bubble if the value really did come almost entirely from what people thought they could sell them for, but the reason the prices stay high is because there are people who actually want the cards enough to pay those prices, in and of themselves, rather than because they can sell them to someone else. In this case, it's not a bubble -- it's just what people value those things at.
Wait, for each buyer their is a seller. So if the U.S. profits from an intervention, doesn't that mean someone else is losing?
Lubin?
First, I don't think the current actors (investors) are centralized. Second, Robin isn't suggesting anyone gets replaced. He's suggesting we add a specialized type of investor who uses government money.
What do you mean by "broken conservation of cashflows" and how do they raise prices?
Hmm, the img tag didn't work. Trying again...
Original source: http://upload.wikimedia.org...
The defining characteristic of a bubble is that, someday, it pops.
There are ways to predict that something is a bubble, and they're often right. However, these methods are really bad at predicting when bubbles are going to pop - and in order to make money by shorting a bubble, you have to know when it is going to pop.
Look at this graph of the NASDAQ Composite index during the dot-com bubble.
If you were a regulator with a pile of cash in 1999, what could you have done to pop the bubble?
It sounds like you disagree with the regulators who claim they can spot bubbles. I didn’t claim they could; I said that if they could, here was an accountable way to have them use that info.Oops. Never mind.
If that would work, the market would already regulate itself and eliminate bubbles, since all traders are trying to do exactly what you want the regulators to do.
It sounds like you disagree with the regulators who claim they can spot bubbles. I didn't claim they could; I said that if they could, here was an accountable way to have them use that info.
We already HAVE a government agency consisting of the "best and brightest" at least looking at offsetting bubbles in one market - foreign exchange. That agency is the US Treasury, and its operating agent is the Federal Reserve Bank of New York. Taking positions in the FX market when the dollar is deemed to be too low or too high is of course called "intervention", is almost always done in concert with other central banks, and it has been consistently profitable since floating started. However, it is very rarely done, because we still live under a paradigm, ingrained in the Washington Consensus, that the market knows best, that intervention is bad, and that FX rates should freely float. That's why we've seen 2 1/2 huge swings in the dollar's value over the past 35 years, despite complete convergence of inflation rates and basic harmony in macroeconomic management policies.
It regulators think they know when commodity prices are too volatile, they should just buy low and sell high; if they are right they’ll reduce volatility and make a profit in the process.
In the comments, Michael F. Martin here and here and Doug S. point out very correctly why your reasoning is unsound.
There's a fundamental problem here.
When you bet against a rising bubble, you're basically betting that the prices of the underlying asset are going to fall. In other words, you won't make any money until after the bubble bursts. Even if you know for sure that a bubble exists, and, indeed, you're right that a certain asset is significantly overpriced, there's no way to make any money on that belief until other people start agreeing with you and the price drops.
It's also possible that a bubble could simply fail to burst at all; the prices could simply stabilize at a high level for non-rational reasons. For example, what's the intrinsic value of a Mickey Mantle rookie card? After all, it's just a piece of cardboard with some ink on it. It's value comes almost entirely from the fact that people believe it is valuable - yet there's no particular reason why the "baseball card bubble" should burst. What makes a canvas painted on by Picasso valuable while a flawless reproduction of the same painting is a worthless "forgery"? They both look the same when you hang them on a wall. Bits don't have Colour.
The defining characteristic of a bubble is not that asset prices are irrationally high. Lots of things are priced well above any "rational" measure of their intrinsic value, and stay that way for what might as well be forever. It's the sudden, precipitous drop in prices that makes a bubble a bubble; much like you can never be absolutely sure that something is mortal until it dies, a bubble isn't a bubble until it bursts.