How to kill investment bubbles

I disagree with the BIS on the issue of interest rates though: they’d like more rises to kill off bubbles. I think significantly more direct action is required that actually tackles the issue and does not penalise ordinary people yet again for something not of their creation. So, significant rises in corporation tax for large companies; wealth taxes; a variable rate financial transaction tax with a rate that rises in periods of financial volatility and more action on bank capital are required, now. These might work. Interest rate rises will just push households into default.

Hmm.

So Robert Shiller tells us that more speculation, the ability of people to sell short in futures and options markets, is what kills bubbles. The Senior Lecturer tells us that we must reduce speculation in order to kill bubbles.

One has the Nobel for economics the other teaches economics in a British university. Isn’t the British student getting a good deal.

16 comments on “How to kill investment bubbles

  1. BIS says stocks look “frothy”. Perhaps they haven’t noticed the giant tax cut working its way through Congress.

  2. So Murph think interest rate rises are bad, but requirements for banks to hold more capital, which push up the margin banks need to earn on their loans and thereby increase interest rates, is OK?

  3. Claiming that Murphy teaches economics is a demonstrably false claim, Tom. I suggest you revise your post to note (far more accurately) that he occupies space in a British university.

  4. “So where do you think Shiller went wrong, dearieme?”

    If he’d wanted a real Nobel he should have pursued Physics, or Chemistry, or Medicine/Physiology.

    Or even Literature or Peace, if he wouldn’t have minded the consequent derision.

  5. If he’d wanted a real Nobel he should have pursued Physics, or Chemistry, or Medicine/Physiology.

    Next you’ll be telling us there should never be a Nobel Prize for sociology… Which is the one I’m waiting for.

  6. I hate people claiming the BAFTAs are our equivalent of the Oscars. No. The ‘and sciences’ bit is missing. The softer Oscars get a lot more publicity than the hard ones awarded two weeks before.
    It’s got a bit like that with the Econ Nobel getting more kudos than the hard scientists who are working at incomprehensibly stratospheric levels.
    Anyone remember Fred Sanger? – I bet 99% of the British population would ask what band he was in. Pity really

  7. We all have an opinion about economics though. don’t we Bongo. Except Murphy, of course. But when did you last hear particle physics mentioned down the pub?

  8. I personally am not sure I would like a prize created by the guy who invented dynamite but each to his own. If physicists and chemists think it’s cool, so be it.

    However I would like to know about research into the adverse effects of abnormally low interest rates – something that matters in the here and now rather than whether some molecule twists to the left or to the right. For example, do these rates encourage firms to hoard cash because banks won’t lend? Is venture capital harder to access? Is innovation still happening? Lots of commentators talk about the slowdown in investment spend : could this be a result of low interest rates? A capital misallocation problem caused by the powers keeping rates abnormally low stifling the animal spirits of entrepreneurs?

  9. If someone ever makes left-twisting sugar they won’t need a Nobel, they’ll be richer than Croesus.

    A molecule that tastes exactly like sugar, bakes exactly like sugar and has zero calories and no side effects!

  10. Actually the best way to kill the investment bubble is to destroy the leverage mechanism that created it. Usually margin trading of some sort, involving some form of bank lending liquidity so that modest returns become enormous, attracting more leverage. All until it reverses and the leverage works in the other direction creating distressed selling.
    I saw Shiller back in 2008 when he was trying to get people to use derivatives based on his Case Shiller index to ‘burst a housing bubble’ when in fact he should have beeen advocating cutting leverage in the sub prime market. But he was to busy trying to flog derivatives.
    Technically raising rates could limit leverage but it’s too blunt an instrument, macro prudential measures better. Look what the Chinese did in 2015/6 to deflate their bubble. The usual crowd said they were clueless at the time, but it looks pretty sensible now only 18 months later. Meanwhile we still have QE almost 10 years later, pushing new leverage into different parts of the market. Personally I am much more worried by the huge leverage in low volatility strategies than I am by bitcoin.

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