How we’ve become accustomed to bubbles bursting the economy, instead of fighting them.

Summary: The financial sector has doubled in size as a %GDP since 1970, far exceeding its previous peak in 1929. The effects have been predictably broad and bad. One late stage symptom is the increased frequency of bubbles, perhaps even becoming our only driver of growth. To understand how this happens we should consult sociologists, such as one of the greatest of the post-WWII era: Daniel Moynihan. He describes how we’ve become psychologically adjusted to bubbles, rather than taking the political action to prevent them.

This is the follow-up to this morning’s Let’s ignore another warning from the BIS. Do we enjoy paying for burst bubbles?  For the 3,000 and 3,001 posts I’ve posted some unusually good material, timely and relevant to us all.

It's time for your heroin!

It’s time for your heroin!

Daniel Patrick Moynihan (1927 – 2003) was one of the greatest sociologists of his day. His prescient observations (often too radical for his time, such as seeing the effects of single-parent families) put him in the top rank of sociologists, as did his applying these skills to become an ambassador and 4-term US senator.

Today we look at one of his major papers: “Defining Deviancy Down“, American Scholar, Winter 1993. I strongly recommend reading it, being rich with insights about America. It gives a sociological analysis describing how we (society) adjust to changing levels of deviancy. Moynihan discusses crime and out-of-wedlock childbirth as forms of deviancy.

We can apply his insights to finance — specifically, the development of asset price bubbles.

About financial bubbles

First, some context. Financial bubbles — unsustainable rises in investments and asset prices — naturally occur in free-market systems. Classroom simulations show how easily they happen. Right-wing bugaboos to the contrary, bubble occur without fractional reserve banking, and happen under the gold standard — as seen in 19th C Britain and America. While painful, they might even have beneficial long-term effects, as did the great 1840s UK railroad mania. But Larry Summers and others fear we’ve entered a new era of secular stagnation, with an illusion of growth from bubbles — shattered when they burst.

This post rephrases Moynihan’s text, changing the subject from social deviancy to financial deviancy. I skip over the theory he gives in the first half. Alterations to the text appear in red; additions in brackets.



In one of the founding texts of sociology, The Rules of Sociological Method (1895), Emile Durkheim set it down that “crime is normal.” “It is,” he wrote, “completely impossible for any society entirely free of it to exist.” By defining what is deviant, we are enabled to know what is not, and hence to live by shared standards.

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Let’s ignore another warning from the BIS. Do we enjoy paying for burst bubbles?

Summary: As one market after another drifts off into bubble valuations, a few institutions warn of the consequences. As usual (we’ve done this so many times), we ignore them — our passivity and ignorance earning our role as the deep pockets paying for the resulting damage. This post looks at a few of the warnings from the venerable Bank of International Settlements — the “world’s oldest international financial organization”, the central banks’ central bank.

For more about this see How we’ve become accustomed to bubbles bursting the economy, instead of fighting them.

This is post #3,000, with over 5.5 million page views since opening in Nov 2007.


The BIS gives us yet another warning about the increasing prevalence of asset price bubbles in our financial system: “Asset Bubbles: Re-thinking Policy for the Age of Asset Management“. A excerpt appears at the end of this post, but the message should be obvious to all by now. Earlier analysis by the BIS pointed to the dangers of rising leverage (traditional buying on margin plus and endless array of derivatives) coupled with expansive monetary policy — and (although they can hardly mention this) little regulation of banks).  This report (carefully labeled as not representing BIS views) warns of structural factors encouraging speculative buying (e.g., herding and trend-following by investment managers). After all, it’s not their money.

It’s an enlightening report, typical of the BIS. It carefully avoids more than gentle questions about central banks’ role in this, especially the “put” (price guarantee) they’ve created on prices of financial assets. On the other hand, let’s be grateful for any warnings we get. Although we’ll ignore them, as we did during the housing and tech bubbles. FAILure to learn is an expensive vice.

Previous warnings from the BIS

These are unusually blunt warnings from an institution such as the BIS. Of course they know better than most that nobody is listening because the game must continue while there is money to be made by the financial industry. It’s the public’s role afterwards to politely write checks for the damage.

William R. White (former CIS chief economist)

“I see speculative bubbles like in 2007.” (Interview, 11 April 2014)

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What’s in a terrorist’s name? A step to understanding the Islamic State.

Summary: The fires expand over the Middle East, driven by centuries of relative decline and corrupt rule, stoked by our interventions. We struggle to understand this phenomenon, cutting through the lies and misinformation fed us. Today guest author Hal Kempfer takes us to the logical starting point: what to call this movement.

“Kindness is a mark of faith, and whoever has not kindness has not faith.”
— Attributed to Mohammad.

Islamic sky

What’s in a terrorist name? Perhaps some meaning.

By Hal Kempfer (Lt. Colonel, USMC, retired)

There is an active debate on terminology regarding the type of terrorists we see involving or inspired by groups such as Al Qaeda and ISIS. (aka the Islamic State of Iraq & Greater Syria, or ISIL, where they refer to the “Levant” vice “Greater Syria”). ISIS is a former Al Qaeda (AQ) affiliate that has almost eclipsed AQ.

The White House does not like the term “Radical Islam” in describing this threat. However, it is descriptive since it implies from whence their beliefs came. However, it also misses what makes them significantly different from mainstream believers of the Islamic faith.

When Anders Breivik killed 77 people in Norway in 2011, most of them school kids, we didn’t call that “Radical Christianity,” nor did we do so in describing the events near Waco, Texas in 1993 or when Larry McQuilliams attacked the Mexican Consulate, Police Headquarters and federal courthouse in Austin, Texas, around Thanksgiving of last year. Further, when Frazier Glenn Miller Jr. attacked the Jewish Community Center and Jewish Assisted Living Facility in Overland Park, Kansas, in April of 2014, we didn’t call it “Radical Paganism,” even though his motivational beliefs were the same as the Nazi pagan cult of WWII.

So there does seem to be a semantic inconsistency.

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Today all roads in Europe lead to Greece, where its future lies in the balance.

Summary:  So many of the threads of history today run through Greece and the Middle East (not for the first time). The range of possible outcomes is wide, from wonderful to horrific. Yet we know too little to make accurate predictions (I suggest making free time by ignoring the confident guesses that overflow the news channels). Here we examine the key facts.

EU flag burning on the ground

Unnecessary death of a dream.

The Greek-Troika negotiations might have large effects on the future of Europe. Here’s my analysis (it’s similar to Tyler Cowen’s , but with more detail).

(1) The news tells us little.

Cowen nails this: “The further apart the various parties appear to be, the more the whip of concession gets cracking. The closer to an agreement they may seem, the greater the incentive to play hardball and demand further concessions.” Also, press releases seek to influence public opinion, not inform us.

(2)  Do both sides have a negotiating strategy? Does either side?

Cowen: “quite often leaders in critical positions simply do not know what they are doing. By no means is that always the case, but it is more often the case than narrative-imposing journalism encourages us to perceive.”

Both sides certainly have a clear understanding of what they want. Do they have a clear negotiating strategy? Or do they just stumble along, responding to events? History overflows with examples of the latter, with July 1914 at the top of the list.

Both sides quite sensibly keep their cards hidden, so we can only guess. Some of their public statements seem disturbing. Like the following from Helena Smith’s interview with Greece’s finance minister, Yanis Varoufakis (The Guardian, 13 Feb). Is he sincere or posturing as a tactic?

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Any day something small might happen that changes the history of the world.

Summary:  These days might be ones of historic significance. America is the fault line of the world, overextended militarily, with a foreign policy of institutionalized belligerence, and papered-over internal divisions. Small events that might happen any day could have almost unimaginable consequences, overturning what we consider the bedrock of our age.  {2nd of 2 posts today.}

“There are decades when nothing happens; and there are weeks when decades happen.” {Attributed to Lenin.}

Political reform will come to Romania only “when apple trees grow pears.”
— Penultimate speech of Nicolae Ceausescu (circa Nov 1989). The crowd jeered during his final speech on 21 December. The regime fell the next day. (The western press reported 64,000 deaths during the revolution; the actual total was aprox 1,000)

"Change" signal
The social structures we see around us often seem immovable and enduring, but rest on sand. Just as natural events can sweep away our physical works in minutes, social changes can uproot societies without warning. Decades of change undermine their foundations, and then a child bumps them and — collapse, revealing a new order that’s grown unnoticed around us. These events occur in transitional periods between eras, much like the long peace of 1815-1914 ended during 1914-1945.

We’re now in the 2nd decade of the transitional period following the post-WWII era, which I arbitrarily start in 2001 — the year of 9/11 (the most effective single military action ever), China entering the World Trade Organization, the end of Europe’s national currencies (the Euro became legal tender on 1 Jan 2002), and what might be the century or millennial low price of oil (~$19 for WTI in Nov).

So far the process has been smooth as transitional periods go, unlike the previous one which started with four years of Hell in Europe followed by a calm decade. However I believe the tensions have been building yet unseen — like continental plates locked on a fault, inevitably to break at some random point in time.

Another analogy is dropping grains of sand to form a pile. Laypeople tend to think of self-organizing criticality as a process of building (e.g., intelligence as an emergent property of a growing neural network); that’s not always so.

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Why the libertarian rich & their bankers love price controls – on money.

Summary: Marx believed that the inherent contradictions in capitalism would bring about its downfall. Events since the crash have revealed contradictions between the values and actions of the 1% and their bankers. But they’ve successfully managed these contradictions. That’s the operational genius of the pseudo-philosophy called libertarianism.  {1st of 2 posts today.}

The price system works so well, so efficiently, that we are not aware of it most of the time. We never realize how well it functions until it is prevented from functioning, and even then we seldom recognize the source of the trouble.

… Prices perform 3 functions in organizing economic activity: first, they transmit information; second, they provide an incentive to adopt those methods of production that are least costly and thereby use available resources for the most highly valued purposes; third, they determine who gets how much of the product — the distribution of income. These three functions are closely interrelated.

Milton Friedman, from Chapter 1 “The Power of the Market” in “Free to Choose” (1980)

Libertarian: more freedom, less government

Libertarians Ascendant

{political movements} “are a kind of ghost town into which anyone can move and declare himself sheriff”.
— Saul Bellow, quoted by Allan Bloom in “Closing of the American Mind”

Investors — whether professional or just rich (the top 1% own 42% of non-home financial assets; the top 10% own most of the rest) tend to some form of libertarianism. Typical of libertarians, their opinions vary — but with one firm tenet: markets should be free. After all, that’s the source of their wealth and income. Their allegiance to free markets has limits, however, when it comes to what they love most: money.

Since the crash the Federal Reserve has intervened in the US economy with actions unprecedented in their size and duration. They pegged the short-term interest rates to zero, and bought 20% ($2.5 Trillion) of the public Federal Debt plus $1.7 trillion of home mortgages. They have controlled the most important prices in an economy: the price of money, expressed through the prices of financial assets. (e.g., see this Citi survey of global credit managers).

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Our escalation shows the key US military strategy: FAILure to learn.

Summary:  The year is only 7 weeks old and we’ve already taken several steps accelerating phase two of our mad Post-9/11 Wars. Our primary method is FAILure to Learn, repeating the tactics that didn’t work during the past 14 years. This will not end well for us. (2nd of 2 posts today}

US foreign policy

A bad idea. Please hit the PAUSE button on our wars.

US forces have begun fighting along side the Iraq army (Apache attack helicopters supporting the Iraq army). Special Operations forces have increased their tempo of operations in Afghanistan. We’ve dispatched a brigade of 4,000 to Iraq, with a vague explanation of its mission (more are warming up in the US to go). Obama’s submitted to Congress a vague Authorization for the Use of Military Force against the Islamic State of Iraq and the Levant (AUMF, to fight the wars already under way).

This makes no sense. We conducted our first wave of wars — Iraq, Afghanistan, Yemen — in direct violation of the two lessons of post-WWII history. Both are quite obvious.

  1. Foreigners (especially foreign infidels) almost never defeat local insurgents. Their presence undermines the legitimacy of the host government and arouses opposition in proportional to their activity (i.e., the more we do, the more they hate us).
  2. Large numbers of troops are needed to have even a small chance of winning (large numbers as a ratio to the local population opposing us). Details here.

Having proven our incompetence at 4GW, now we escalate to outright madness by repeating the same failed methods but on a smaller (and hence less likely to work) scale. It’s a FAILure to learn, a weakness no amount of power can counterbalance. Not at WWI levels (doubling down with failed tactics), but still inexcusable.

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