One of the many fascinating aspects of the recent crisis of credit is discovering that many people predicted something like this would happen as far back as 2002, like the hilarious stockbroker/blogger Daniel Davies does here. Since reading his analysis of the post dot-com boom I have been on the look out for similar predictions of the next big bubble. And here we have one from Peter Boone and Simon Johnson at the New York Times:
The next global bubble is already under way. What happens when the most powerful nation in the world, with a reserve currency everyone trusts and holds, decides to push a big credit expansion — again, at the instigation of our financial sector? The creditworthy borrowers this time are not in the United States — they are in Asia, Latin America, and even Africa. They have little debt and great prospects; for a mere 1 percent per year they can borrow American dollars, spend the funds at home, and turn paper money into real assets. Every great bubble begins with a truly convincing shift in fundamentals.
In the 1990s this was called the “carry trade.” You borrowed from the Japanese at 1 percent and bought anything outside Japan that yielded a bit more (including United States subprime mortgages). The coming American carry trade is the same thing: it weakens the dollar, lifts the economy out of recession through exports, and creates inflation that reduces the real value of our debts.
It will be interesting to see whether this latest scheme works superbly forever or results in a collassal failure some years down the line. But if and when it does fail and results in another recession it will kind of suck.
Are recessions a normal and inevitable part of capitalism and free markets as they currently exist, and if so, is there something that can be done to improve the situation?
[from the New York Times][image from woodleywonderworks on flickr]
George Dyson has an excellent and compelling essay on game theory, economics, information theory, computer science, banking, finance, technology, and John von Neumann:
We are surrounded by codes (some Turing-universal) that make copies of themselves, and by physical machines that spawn virtual machines that in turn spawn demand for more physical machines. Some digital sequences code for spreadsheets, some code for music, some code for operating systems, some code for sprawling, metazoan search engines, some code for proteins, some code for the gears used in numerically-controlled gear-cutting machines, and, increasingly, some code for DNA belonging to individuals who serve as custodians and creators of more code. “It is easier to write a new code than to understand an old one,” von Neumann warned.
The monograph over on Edge discusses von Neumann’s intellectual antecendants and the development of game theory and statistical modelling. It also includes some interesting commentary on our recent economic difficulties. Definitely worth a read.
[image from kevindooley on flickr]
There’s no shortage of weird and wonderful ideas flying around with regard to fixing the financial systems and making them fairer for the end users (i.e. most of us), but this is the first time I’ve heard this one crop up: state-backed interest-free transactional credit – or, in layman’s terms, a credit card issued by the government.
Access to revolving credit should be rationed, but transactional credit should indeed be ubiquitous. Not having to carry and count cash, deal with paper checks, or even worry about some particular account’s balance at the time of purchase are important benefits. Indeed, an efficient payments system is a public good. That’s why states are in the business of establishing currencies, right?
In fact, while transactional credit provision is a perfectly good business, it might be reasonable for the state to offer basic transactional credit as a public good. This would be very simple to do. Every adult would be offered a Treasury Express card, which would have, say, a $1000 limit. Balances would be payable in full monthly. The only penalty for nonpayment would be denial of access of further credit, both by the government and by private creditors. (Private creditors would be expected to inquire whether a person is in arrears on their public card when making credit decisions, but would not be permitted to obtain or retain historical information. Nonpayment of public advances would not constitute default, but the exercise of an explicit forbearance option in exchange for denial of further credit.) Unpaid balances would be forgiven automatically after a period of five years. No interest would ever be charged.
As is immediately pointed out in the resulting comment thread at MetaFilter, there’s a strong aroma of socialism around that idea which would prevent its adoption… not to mention the fierce anger of the credit card companies, should the idea be tabled seriously. But if there’s one thing we should have learned over the last few years, it’s that schemes which frighten the companies who make a killing by lending us money are well worth considering more closely.
That’s one of the reasonings in a Guardian article today entitled ‘Toxic Shock: how the banking industry created a global crisis’. With policymakers unsure about what to do, many regulators are starting to get tougher with their requirements, which will make credit less abundant. As much as $1 Trillion dollars could have been lost in the crisis, and that number could rise. In the short term, it’s likely to lead to difficulties in loans. In the longer term, reregulation and tighter lending standards will change the shape of the world economy.
That’s not to say the economy is totally without worth at the moment. Wired’s latest issue has a series of 9 articles on positive business trends in 2008, including open source software and ‘Instapreneurs’ that make their products with virtually no lead time in a manner very much like in Futurismic’s April short story, ‘Mallory’ by Leonard Richardson.
[via the Guardian and Wired, photo from I Can Haz Cheezburger via Shiny Things]