Obama Talks Bubbles & Bubble Avoidance


Barack Obama is focusing his economic rhetoric on the dangers of bubbles:

President Barack Obama, who took office amid the collapse of the last financial bubble, wants to make sure his economic recovery doesn’t generate the next one.

Obama this month spoke four times in five days of the need to avoid what he called “artificial bubbles,” even in an economy that’s growing at just a 1.7 percent rate and where employment and factory usage remain below pre-recession highs.

“We have to turn the page on the bubble-and-bust mentality that created this mess,” he said in his Aug. 10 weekly radio address.

In the long run, this goal — of avoiding inflating economic bubbles that change the structure of production both as they inflate and deflate — is laudable. The best manner in which to achieve it is through the teaching and discussion of history. A key qualitative factor in most bubbles seems to be the forgetting of history, the sense that this time is different, the sense that we may have reached a new stable plateau upon which asset prices can only rise. With the rise and popularisation of notions like the Great Moderation or the end of speculation, investors put down their guard and increasingly engage in riskier behaviours, like flipping condominiums, or buying stocks with leverage. The bubble is a mentality — risks will remain at bay, sentiment will remain high, externalities won’t disrupt activity. This is fine if the risks that investors have begun to ignore never materialise, so not every asset that soars in price is a bubble. Many asset classes including treasuries and junk bonds today are at record high prices, but the Fed is determined to do whatever it takes, and so sentiment has held in spite of naysayers like Marc Faber and Peter Schiff talking of the inevitability of a crash since the recovery began in 2009. The risks have so far remained at bay. But very often the risks that are assumed to have gone away reappear, and all it takes for the market to go into freefall is for sentiment to turn and investors to start selling. Asset valuation is not a question of fundamentals. It is a question of abstractions away from fundamentals. As John Maynard Keynes noted:

[Investing] is not a case of choosing those [faces] that, to the best of one’s judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.

What this means, as Minsky noted, is that avoiding the possibility of economic bubbles is really, really difficult (if not impossible by definition). Each stabiliser leaned upon to stabilise markets becomes another assumption lulling investors into assuming that this time is different and thus into riskier behaviours. Keynes and Minsky both recommended fiscal policy as the stabilisation lever, but fiscalism has become unfashionable and politically challenging.

Obama’s chosen mechanism for avoiding bubbles is decreasing income inequality. In fact he sees income inequality and economic bubbles as being intimately connected:

Even though our businesses are creating new jobs and have broken record profits, nearly all the income gains of the past 10 years have continued to flow to the top 1 percent. The average CEO has gotten a raise of nearly 40 percent since 2009. The average American earns less than he or she did in 1999. … This growing inequality not just of result, inequality of opportunity – this growing inequality is not just morally wrong, it’s bad economics.

Because when middle-class families have less to spend, guess what, businesses have fewer consumers. When wealth concentrates at the very top, it can inflate unstable bubbles that threaten the economy. When the rungs on the ladder of opportunity grow farther and farther apart, it undermines the very essence of America – that idea that if you work hard you can make it here.

It’s not sustainable to have an economy where the incomes of the top 1 percent has skyrocketed while the typical working household has seen their incomes decline by nearly $2,000. That’s just not a sustainable model for long-term prosperity.

This is all true. But it’s also all rhetoric. In his nearly five years in office, Obama has totally failed to get income inequality under control. According to Pew Research, since Obama came to office:

Mean net worth of households in the upper 7% of the wealth distribution rose by an estimated 28%, while the mean net worth of households in the lower 93% dropped by 4%

Research from the Bank of England shows that the main transmission mechanism used by central banks — specifically, reinflating asset prices — disproportionately favours the richest in society; those who already have assets whose prices can be lifted. The policies that Obama and Bernanke have pursued for the past 5 years have been tilted toward assisting the wealthy. The recovery has been a recovery from and for the top, while the poor have continued to experience greater social fragmentation, weakened social programs, and long-term unemployment. This has all been cemented by Obama’s own policies.

So while avoiding asset bubbles and reducing income inequality are laudable goals it is highly questionable that Obama — who has embraced an austerity agenda — will come close to achieving either.

UPDATE: Miles Kimball on Twitter points me toward Anat Admati’s suggestion of implementing bank capital requirements to make bubbles less damaging. This is a very fair suggestion, because it is a stabiliser that does not lean on the idea of eliminating bubbles, but the idea of limiting their impact. Obviously, rules can be gamed, but if implemented properly it could systematically limit the size of bubbles, by cutting off the fuel of leverage.

30 thoughts on “Obama Talks Bubbles & Bubble Avoidance

  1. Just curious: Do you feel that the low short-term rates of the early 2000s and the “Greenspan/Bernanke put” on equities have had no negative effects on asset price instability?

  2. Bubbles indicate excess liquidity and in fact are the definition of problematic (forget hyperinflation, won’t happen in the U.S.) inflation. The bubbles in this economy over the last 15-20 years (staring with “irrational exuberance” (IE) – tight money is a sure cure for IE) are unprecedented and correspond to the phony inflation numbers and the failure to rein in money supply (use whatever proxy for money supply you like).

    Why are the rich getting richer? It’s the chum boat scenario. When a chum boat throws a massive amount of chum off the boat, who gets the chum. The sharks. So the Fed is throwing money into the economy and the sharks (the wealthy and their connecteds) are the ones that know how to get it.

    Ok – want some data?

    Below is my data from the Bureau of Labor Standard’s web site.
    Between Jan 2003 and Jan 2013 (except where noted) here is the OFFICIAL BLS CPI followed by the BLS OFFICIAL price (percent) increases during that same period for a collection of goods. CPI is roughly equivalent to price inflation.

    CPI: 27.1%

    Eggs: 64.5%
    Fuel Oil: 175.1%
    Gasoline: 118.8%
    White Bread: 36.5%
    Ground Beef: 59.8%
    whole chicken: 49.1%
    milk 31.3%
    red del. apples: 38.2%
    naval organges: 39.0%
    bananas: 15.8%
    tomatoes: -9.7%
    orange juice: 35.9%
    coffee: 96.8%
    elecricity: 44.9%
    util gas: 13.1%
    higher education: 91% (Jan 2001 and Jan 2011)

  3. We have a credit crunch caused by excessive and irresponsible lending followed by years of excess unemployment, and the solution adopted? Why, it’s to cut interest rates and encourage yet more lending.

    The describe those running Western economies as economically illiterate morons would be excessively polite.

    • Excellent article Aziz. Rhetoric is destroying any chance of a real recovery. Obama gets no coverage in Australia. I guess he is in caretaker mode. Lets hope the economy does not crash on his watch giving the Republicans an easy win. Speaking from my experience gained on this campaign trail The MSM is managing this side show . Invest accordingly. Got z gold?y

  4. Obama is “not quite bright.” Of course the austerians are even worse. What we need to ask ourselves is: Does it entail more continuous money creation to GIVE individuals a supplement to their inadequate incomes, or to only let them borrow (that is, enforce only borrowing) in order to avoid the austerity enforced by inherent systemic price inflation?

    If we want economic democracy and income equality then supplement everyone’s individual income with a universal dividend. It’s the perfect tool/policy of economic democracy, and because it will enable the 94% whose incomes are inadequate to have a CHOICE about borrowing or not (or borrowing less for shorter terms, and so paying less interest) ….it will tend to equilibrate income inequality as well. And most important, it will break up the monopoly on credit creation as well as the straightjacketing and narrow purposes for which finance is currently granted.

    Inflation? As I said above GIVING people money will entail less money creation and hence less monetary inflation. Then all we have to do is honestly confront the empirical data found in any business’s cost accounting books which reveals that labor costs (individual purchasing power) are only a fraction of total costs. Since ALL costs must go into price that means that at the moment of a line of production’s creation….it is already PRICE INFLATIONARY. And of course being a part of a business which must recoup at least as much in prices as it has cost them to operate…this inflationary reality continues and builds up all the way through the economic system to where all costs are summed…at retail sale….to an individual.

    Velocity of money? What a bunch of anti-historical, unexamined orthodox BS that is. I don’t care how much money “re-circulates” if it re-circulates through a business (and how else is it going to do so?) then it will re-initiate the same inherent price inflationary reality of the productive process. Price inflation IS INHERENT TO THE PRODUCTIVE PROCESS ITSELF.

    And it can only be remedied by GIVING individuals money BEFORE it goes into commerce.

    • Agreed. See my earlier posts on social dividends paid from taxation if 0.1percenters hiding capital in off shore trusts. Capital needs to recirculate not borrow our way out

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  6. “Research from the Bank of England shows that the main transmission mechanism used by central banks — specifically, reinflating asset prices — disproportionately favours the richest in society; those who already have assets whose prices can be lifted.”

    And they say that the B of E doesn’t hire the brightest among us!

    99.9% of EVERYTHING that happens on this planet favors the wealthiest in society. Remember, the wealthiest are are such because they are willing to do whatever it takes…lying, cheating, and especially stealing [or hiring people who do this in their stead].

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  8. Aziz – “What this means, as Minsky noted, is that avoiding the possibility of economic bubbles is really, really difficult (if not impossible by definition). Each stabiliser leaned upon to stabilise markets becomes another assumption lulling investors into assuming that this time is different and thus into riskier behaviours.”

    More like each “scheme” hatched to “prop up” markets/asset prices “entices” speculators to leverage up while the sun shines.

    These schemes push prices up (houses, food, rent, gas, etc.), which squeezes the little guy who spends the same amount of money, but gets less.

    These bubbles can’t be stopped? Take away cheap and easy credit and limit leverage significantly, and you won’t form a bubble in the first place.

    “No Jackasses, Cheap Credit Does NOT Help (Anyone)”:

    “The truth is that the basic laws of economics tell you that when there are more buyers willing to pay a given price irrespective of how or why, the price of that item will tend to rise. This is true whether the thing is a car, a house, health care, college tuition or anything else.

    Ultimately this forces anyone who wants said thing to use credit to obtain it as the ability to pay cash dwindles away.

    And that, ultimately, destroys the middle class by making the true cost of such pulled-forward demand rise so high that it cannot be afforded at all.

    So long as the government coerces this behavior for its own benefit so it can hand out money to its favored few, whether those be “poor” people (with iPhones of course) or defense contractors, this cycle continues until it is either voluntarily abandoned or it is forced to stop by impact with the zero boundary.”


  9. If you choose to make all drugs legal [accessible], then you have to accept the fact that a certain percentage of the population will become addicted.

    In the same vane, if you choose to allow the most deranged sociopaths in your society to take control of the banking system, then it would also follow that you must also accept the inevitability that your society is going to be f***** over, BIG time.

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  11. We’d probably avoid more asset bubbles if the Fed wasn’t so active in blowing them up and then popping them willy-nilly. (From QE3 to tapering… and back again?)

    We really need to look at Selgin and White’s research on free market alternatives to central banking. And not just for the benefit of the US economy. As David Beckworth says, the US is a monetary superpower. The asset boom/busts the Fed exacerbates can hurt other countries also.

    It appears that there may be a new Asian Financial Crisis underway.

    “The stock market is Indonesia had several big loss days in a row, with some daily drops over five percent, and their credit-driven economic expansion seems to be over.”

    “The Thai economy has shrunk for two consecutive quarters and total debt (public and private) to gdp ratio is now about 180 percent. Malaysia also has serious debt problems.”


    “This provides further confirmation that the Fed’s recent monetary stimulus effort and the artificially low dollar rates have been responsible for a great deal of capital flows into emerging markets. Now we are seeing a sharp and to some extent an uncontrolled reversal of these flows. And many of these nations’ central banks find themselves quite helpless in the face of this correction.”


    • Why people continue to support the Federal Reserve is beyond me. And support for Yellin complete with Fed propaganda that she has been most “prescient” of Fed big shots (a low bar to be sure) on financial matters is appalling. The Fed’s primary goal is not to manage the financial markets but to ensure its own existence. I wish the American people would wake up to this crap along with a lot of other crap in the U.S. As for the Asian markets, I guess U.S. foreign aid buys a lot of world leaders.

      My message to the world is to refuse U.S. Federal Funny Money and tell the U.S. to take a hike.

      • It just not the just U.S., it’s everybody. People want something for nothing, so they create these monstrous institutions because this is the most effective way to steal from the majority of people.

        This has been going on forever. It’s just particularly interesting now that it is so obvious. And how an institution like the Fed gets away with what they do is beyond me, too.

        It just shows the lengths people will go to not to have to take responsibility for their own lives. It’s pretty pathetic.

  12. Robert Hall (Hoover Institute and Stanford) from his academic paper presented at Jackson Hole:

    “The U.S. economy entered this state because a financial crisis originating in a fi nancial system built largely on real-estate claims came close to collapse when the underlying assets lost value.”

    Karl Denninger:

    “Read: The underlying “value” never existed; it was a wide-scale fraud.”

    Robert Hall:

    “Rising risk premiums discouraged investments in plant, equipment, and new hiring. Weakened banks and declining collateral values depressed lending to households and forced their deleveraging.”

    Karl Denninger:

    “Read: The leverage was ill-advised and founded on nothing more than hot air; when discovered, the lack of sustainability of the lending was exposed and the exponentially-built bubble burst.”

    Robert Hall:

    “The combination of low investment and low consumption resulted in an extraordinary decline in output demand, which called for a markedly negative real interest rate, one unattainable because the zero lower bound on the nominal interest rate coupled with low inflation put a lower bound on the real rate at only a slightly negative level.”

    Karl Denninger:

    “Admitted: The real rate of interest, which must always be positive in a stable economic environment, such that borrowing to produce is incentivized rather than borrowing as a ponzi scheme, as the intent is to never pay off the loan but rather to roll it over at ever-decreasing rates of interest that are negative in real terms, has been the underlayment for the economy over the last 30 years.”


  13. “We can further question broad-based measures of expansion such as GDP statistically: in economies with high income/wealth inequality such as the U.S., the top 5%’s expansion of income and wealth creates an illusion that the entire workforce is doing better when the opposite is true.

    If you doubt this, please examine this chart of income disparity. Note that the vast majority of income increases have accrued to the top 5%. […]

    In other words, huge leaps in the income and wealth of the top 5% mask the decline of income and wealth of the bottom 95%. Average all wealth and income and it appears that the economy is expanding to the benefit of all, when it fact only the top 5% have escaped the recession; the recession never ended for the bottom 95%.

    An even better way to create an illusory expansion is to simply not measure trends that would reveal a deepening recession. For example, what percentage of student loans are purposefully taken out as a substitute for income, i.e. used to pay basic living expenses rather than education? Anecdotally, there is plentiful evidence that a great many people are signing up for one class at the local community college in order to get a student loan to live on.

    Is it any wonder that student loan default rates are soaring? The people taking out student loans just to get by have no means to make payments once the loan money is consumed.

    Is an economy of people obtaining student loans they have no way to service as the only available means to keep themselves off the street a healthy economy? […]

    The reality is that the recession never ended for 95% of U.S. households, and by many metrics the recession has deepened. The trick is to not measure those metrics; what isn’t measured doesn’t exist, especially recession. ”


  14. The risks have so far remained at bay. But very often the risks that are assumed to have gone away reappear, and all it takes for the market to go into freefall is for sentiment to turn and investors to start selling. website design

  15. Although we experience the rising prices and observe the changes to investment, what is important is to determine the basic cause or starting place of the bubble nature of our macro-economy. After a bubble begins it will surely influence the prices of lots of things, so where does the cause lay?

    Before the 2007 economic crisis, the first thing to begin to rise in price was the cost of land. This was because land owners were speculating in this natural resource and with the help of the banks (who see land as a good thing in which to invest), they began to purchase the land around new developing regions, with the belief that it would not be long before this land would rise in value. It did. One reason apart from this obvious one was that when land is held unused there are fewer sites available for use and due to the competition for them. Then the sellers (who begun speculation early) saw that they would make a killing (or bundle) if they sold before too late, when the bubble of land prices inflates too much and the situation ceases to remain stable and steady in its change.

    Speculation in land values is the basic cause of this rapid rise in prices, just before the bubble bursts. Certain banks who could see this coming sold their (so called toxic) mortgages and the collapse affected those banks whose managers were less aware. In an effort to avoid such a sudden collapse, the government (and Fed) reduced the rate of interest so that it would be easier to borrow, but the losses that followed the collapse resulted in a smaller amount of money being available for loan, so the banks had to be helped “bailed out” with relatively high-rate interest short-term loans.

    To avoid future bubbles in land prices (and a new one is already on its way) there should be a serious attempt by government to control the way that speculation in land prices occur. The most obvious way of doing this is to make such speculation not worthwhile, by taxing land values, especially those sites near development regions. By reducing other kinds of taxation, there would be less money going to the speculators and more being available to the consumers, which means greater demand and employment–in other words prosperity!

  16. I’m 62, well educated and well read, and I never heard of a bubble until the dot com bubble. Sorry, but the tulip bubble has nothing to do with economic bubbles of the last 20 years.

    So bubbles are associated with modern monetary policy of activist central bankers and the absence of honest price discovery. The US stock market is currently in a massive bubble that will burst soon. David Stockman is the guy to read. He has it nailed with ZIRP fueling the casino gamblers (Wall Street, big bankers).

  17. Obama is a liar about bubbles and nearly everything. The more money the Federal Reserve pours into Wall Street, the more people can attend Obama’s $40,000 per plate dinners. Obama has no incentive or desire to change this giant kickback (American politics is all about Kickback schemes – K Street stands for Kickback Street) scheme known as the Federal Reserve ZIRP policy.

  18. President Barack Obama, who took office amid the collapse of the last financial bubble, wants to make sure his economic recovery doesn’t generate the next one.having voluntarily taken over Union Carbide’s assets and liabilities HCG drops

  19. Research from the Bank of England shows that the main transmission mechanism used by central banks — specifically, reinflating asset prices — disproportionately favours the richest in society; those who already have assets whose prices can be lifted. The policies that Obama and Bernanke have pursued for the past 5 years have been tilted toward assisting the wealthy. for more information click here

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