Alex Tabarrok has a very good post on "bubbles", or investment markets that get over-blown and then collapse. He discusses all the major points, namely the difficulty in identifying bubbles, the difficulty in diffusing them, and the resilience of bubbles against education (but not wisdom gained through experience!). There are repercussions for monetary policy, rational choice theory, regulatory policy, and portfolio theory.
Most of the post simply summarizes the high points in the academic literature on bubbles and investor sentiment, but these arguments are worth reiterating (and note that Daniel Gross has argued that bubbles are a net positive force, although I don't see anyone mentioning his argument these days). Please read the whole post, and if you're feeling ambitious read the cited articles as well (esp. the Vernon Smith). I have criticized Tabarrok before, but I can't see a flaw in this post.
Some smart people have argued that the Fed, or another national regulator, should be in the business of identifying and deflating bubbles in an attempt to prevent the shocks that occur when a bubble pops. Other smart people have argued that this is impossible. Still other smart people have argued that even if it is possible for investors to identify bubbles and bet against them, "the market can stay irrational longer than you can stay solvent".
So this leads me to a challenge: Predict the next investment bubble to catastrophically explode. I'm not asking for any money to be put on the line; just a wild-haired guess. There's nothing on the line, because by the time it happens this post will be long forgotten. This is only in fun. I insist that all of my fellow IPE@UNC authors participate in the comments or their own posts (and yes, that includes SBD), but I'd also love to see some predictions from readers and other bloggers.
Here's mine: The easy bet is on Eastern Europe, but I think that's for suckers. Those markets have already inflated and deflated several times in the past two decades, and I think investors will have learned some lessons. So my bet is on China. So far, the PRC has been careful to monitor and regulate portfolio investment inflows, but if China is going to fully integrate into the global economy that will have to change. There are already signals that China has over-reported its growth rates and may be not be quite as prepared to emerge as a global economic power as commonly believed. Add to the mix a reliance on exchange-rate stability and a strongly export-biased growth model and China seems ripe for some over-reach in the coming decade. I still remember the 1990s, and as strong as China looks now, Japan looked even stronger in 1994.
I don't actually expect to be right about this, and I'm certainly not prepared to wage real money on it, but that's the fun. So let's hear it.
IPE @ UNC
IPE@UNC is a group blog maintained by faculty and graduate students in the Department of Political Science at the University of North Carolina at Chapel Hill. The opinions expressed on these pages are our own, and have nothing to do with UNC.
Bookshelf
Tags
Academia Adjustment Afghanistan Africa AIG America Argentina Austerity Bailout Banking Bargaining Basel Bernanke Bias Blogging Business cycle; recession; financial crisis Cap and Trade capital controls capital flows central banks; moral hazard Chavez China China Trade Climate Change Contentious Politics Cuba Currencies Currency Crises; financial crisis Current Account Data Debt Debt; China; United States; Decession Politics Decoupling Deflation democracy Democrats; Trade policy development Diplomacy Dollar; China; Currency Manipulation; Exchange Rates dollar; exchange rate policy ECB ECB; Fed; Monetary Policy Economic Growth Economics Egypt election EMU; monetary union Environment EU; Agriculture; Common Agricultural Policy Euro Europe; labor; immigration European Union Exchange Rates Farm Bill; Agriculture FDI Fed; Monetary Policy finance financial crisis financial crisis; subprime Fiscal Policy; monetary policy; elections Fiscal Stimulus Foreign Aid Foreign Policy France Free Trade Agreements G-20 G20 Summit Game Theory Germany global recession globalization Grand Theory Great Britain Greece health care reform Hegemony Human Rights Iceland imbalance IMF immigration Incentives income distribution income inequality; globalization India Inequality inflation institutions Interests international finance International Law International Monetary System International Relations Investment IPE Iran Iraq Ireland ISA Italy Japan labor markets Latin America Libya Macroeconomics Marxism Mexico Microfinance Miscellany monetary policy Monetary policy; Federal Reserve moral hazard Narcissism Networks Nobelist Smackdown North Korea Obama Oil PIGS Pirates Political Economy Political Methodology Political Science Political Survival Political Theory Power Protectionism Protests Public Choice Public opinion Rational Choice regulation Research Review Russia Sanctions Security Dilemma security threats Soccer Social Science Sovereign Debt Spain Sports Statistics stock markets Systems Tariffs TARP Taxes TBTF Technocracy technology terrorism Trade trade policy UNC Unemployment United States US-South Korea Venezuela WTO WTO; Doha
Blog Archive
-
▼
2009
(521)
-
▼
July
(53)
- This Is How I Feel About Comprehensive Exams
- Was I Wrong to Be Worried About Deflation?
- Obama's Realism
- When Walloons and Flemings Collide
- Neda Agha-Soltan
- If the Chinese Pop a Bubble, Does It Make a Sound?
- More on Pirates!
- Religiosity and College Majors
- Blowing Bubbles
- Kenneth Arrow on Macroeconomics, Health Care, and ...
- Sentences I Liked
- Miss Teen South Carolina on Economics
- What I've been reading (July Edition)
- Show Some Love, Harvard Law School!
- Merda!
- Weekend Links
- What the U.S., China, Russia, and Turkmenistan Hav...
- More Evidence on the Effectiveness of Microfinance
- Is China Really Pulling Away from American Debt?
- American Diplomacy and Public Opinion
- Obama's New International Poll Numbers
- The Fed's Balance Sheet
- US Treasury Cashes in
- What, Me Worry?
- Morning Links
- Politics =/= Magic
- Perception and Misperception in Trade Politics
- Who Gets E.U. Farm Subsidies (redux)?
- Quote of the Day
- Political Science and Economics Professors
- Video Time!
- How Soccer Illustrates Globalization
- It's Earnings Season!
- Thomas Schelling on Climate Change
- The State of Banking
- IR Theory and Rap Music
- FDI, Regulation, and Shifting Power Centers: China...
- How Not to Conduct Diplomacy
- The Pope on Development
- Some Things Get Better, Some Things Get Worse
- Obama's Summer Vacation
- Link Dump
- No G-8 Climate Change Deal
- The Data Do NOT Show the Paradox of Thrift
- Iran Organizational Chart
- Art Imitates Social Science
- Basel's Revenge
- Prescience
- The U.S. Plays Chicken with the BRICs
- We Hold These Truths to Be Self-Evident
- Straight Outta Lagos
- More Musings on Climate Change
- How to Destroy An Economy, in Five Easy Steps
-
▼
July
(53)
Wednesday, July 29, 2009
Blowing Bubbles
Subscribe to:
Post Comments (Atom)
0 comments:
Post a Comment