Nothing else.
Restrict credit creation and you restrict bubbles.
Replace secured debt with an alternative form of property investment that works, and bubbles will be history. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
The fallout will be limited, because it won't lead to a general contraction in the money supply, which means that it (probably, and if it's not too big) won't lead to major parts of your economy being without liquidity. And it would change the balanced between creditor and debtor, because when you use equity financing, the creditor takes a haircut along with the debtor, unlike debt financing where the debtor gets wiped out before the creditor is even touched.
But there is nothing in curtailing credit that inherently prevents people from overpaying for an asset in the hope that a greater fool will come along and overpay even more.
- Jake If you only spend 20 minutes of the rest of your life on economics, go spend them here.
You can run a Ponzi scam just fine without formalised credit creation.
Ponzi scams are not necessarily related to bubbles. A Ponzi scam in simple terms consists of paying income out of capital.
JakeS:
The fallout will be limited, because it won't lead to a general contraction in the money supply, which means that it (probably, and if it's not too big) won't lead to major parts of your economy being without liquidity. And it would change the balanced between creditor and debtor, because when you use equity financing, the creditor takes a haircut along with the debtor, unlike debt financing where the debtor gets wiped out before the creditor is even touched.But there is nothing in curtailing credit that inherently prevents people from overpaying for an asset in the hope that a greater fool will come along and overpay even more.
I stand corrected, in that it is indeed possible for assets to be over-priced into a Bubble without credit/leverage. The Dot Com Bubble is an example where leverage played a relatively small role.
Having said that, all Real property bubbles, and most other bubbles eg the Private Equity Bubble now collapsing to give swathes of unemployment, were caused by credit/leverage. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
Money markets are inherently and unavoidably Ponzi-ish - stock prices can only increase when people throw money at them, which means more money is entering the system, which means that payouts can appear to increase.
As long as there's some connection to real wealth creation, this can work, for a while, although it's not a healthy way to run things.
As soon as markets switch to speculation and a bubble appears, cash floods in - and then mysteriously disappears as the bubble pops.
Technically a Ponzi scam consists of paying income out of income.
Say ten people each invest £100,000 because they are promised 20% return per year and nothing else happens (ie the £1m is kept under the bed or invested at 0%)
Say the manager takes out the usual hedge fund 2% management fee and 20% of the 20% fake "profits".
At the end of Year One the punters get £200k, and the manager gets 2% of £1m plus 20% of £200k ie £60k.
So £260k is distributed, and all of it is Capital.
Same in Year Two
Same in Year Three
The shit hits the fan at the end of Year Four when it's all gone.
But I cannot see how such a Ponzi scheme (the above being my understanding of a Ponzi scheme) is anything other than paying Income from Capital....
ThatBritGuy:
Money created by credit institutions as interest-bearing debt is arguably as dubiously based as Ponzi schemes, yes.
As long as there's some connection to real wealth creation, this can work, for a while, although it's not a healthy way to run things. As soon as markets switch to speculation and a bubble appears, cash floods in - and then mysteriously disappears as the bubble pops.
I would argue that the key difference lies between
(a) credit creation for the purpose of building new productive assets - where bankers such as Jerome fulfil a valuable role; and
(b) credit creation for the purpose of purchasing existing productive (or hopefully productive) assets, which is where Bubbles and Ponzi schemes come in. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
(b) credit creation for the purpose of purchasing existing productive (or hopefully productive) assets, which is where Bubbles and Ponzi schemes come in.
Surely that should be net credit creation, right?
If I borrow a hundred thousand € to buy stock on the margin, and the dude I buy it from uses that 100k € to re-pay a broker's loan, then Nothing Happens(TM) to the money supply.
The problem is when the dude I buy the stock from rolls over the loan and uses the money to buy other stocks - because then new money is infused into the stock market, which causes stock price inflation (unless a commensurate amount of real value is added to the stock market through IPOs).
I think the difference is more that speculation is - jargon aside - designed to make a quick buck from thin air.
The commodity that's being traded isn't income or ROI, it's faith in possible income which may - speculators hope - be created by the perception of possible profit by other investors.
In other words it's a stampede of greater fools, all of whom hope that they're not the ones buying at the top.
Buying and/or investing in existing assets isn't inherently speculative if it's managed in a sane way, and expectations of returns are reaonsable.
Someone I was talking to recently was regretting that she hadn't spent 20k on an existing cheese deli business which had been doing well on her high street.
There's no bubble there - just a business with an unspectacular but steady turnover and which should, recessions aside, repay an investment in a reasonable time, and then produce a profit.
A bubble would happen if the store became incredibly fashionable and decided to cash in by selling cheese deli futures.
With the right PR, the futures would spiral into the stratosphere and then crash. The buying and selling of cheese would be irrelevant - the actual commodities driving the price of the futures would be hope, optimism, guile, greed and wishful thinking.
That's true, of course: Not all Ponzi scams are related to bubbles. But I'd argue that all bubbles have the characteristic features of a Ponzi scam.
