October 25, 2008
The other bubble
Everyone's talking about the housing bubble. And how it's really that lead to the current financial crisis. I'm starting to wonder if it isn't something more basic. I'm not an economist, but these days that might not be a bad thing, as 1) I don't really believe that economics is a science worthy of the name, and thus I believe that all the models are pretty much crap, and 2) even if that were wrong, it doesn't appear that any economist has an adequate explanation for what's going on.
The thing I've noticed is that if you look at the numbers (run the range out to "Max" to see what I'm talking about here), the DJIA was below 2000 from 1970 until 1987. Pretty much no growth. Then between 1987 and 1995 it rose to 4000, doubling in eight years after twice that time of no growth at all. Then it doubled again in the three years leading up to 1998. After almost 4000 points of gains, it returned to the 8000 range by the end of 2002, another four years. Four years later, the Dow had added 6000 points, but hey, we're back to 8000.
What if the bubble isn't housing prices? What if it's stock prices? And what if the bubble goes all the way back to the mid-1980s? Why should the two decades of no growth ending in 1987 be considered abnormal and the two decades of "growth" since then be considered normal? Why should stocks grow in price at all? Remember, what you're buying is a piece of a company. But unless that company actually pays you a portion of its profits, i.e. a dividend, exactly what is it worth to you? It's been quite some time since people treated stocks as a source of income rather than a source of capital. People buy stocks these days not because stocks pay dividends but because stocks are presumed to increase in value. I cannot for the life of me think of any rational reason why this presumption is true, particularly when many stocks don't even pay a dividend. The entire world has been dealing in corporate stock as speculators for most of the past two decades.
My takeaway from this is that you shouldn't listen to most economists. Economics is bunk. Particularly the kind that tells you that there's a basic policy change to be made that could have avoided all of this. I'm looking at you, Mr. Gold-Standard-Wingnut. Economics may be bunk, but that's old bunk. There isn't any way of making that math work.
Economics may not make any sense, but accounting does. And if you try to sell me an asset which pays no reasonable portion of its cost but is somehow magically supposed to increase in value... I also hear that there's a bridge in Brooklyn for sale.
