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Wednesday, February 28, 2007

Not So Tiny Bubbles?

Robert Reich says watch out, the bubble bursting may not be over:

Why the Stock Market Tumbled -- and What's to Come, by Robert Reich: As of right now (11:15 am Pacific time, Wednesday), it looks like Wall Street is putting a the best face possible on yesterday's "correction." (A "correction" is a Wall Street euphemism for "holy shit!") But it's way too early for a sigh of relief. When the stock market takes a big hit, ... ask yourself two questions: What underlying speculative trend has been getting out of control? And what was the wake-up call that alerted investors to it?

This time, the out-of-control trend has been excess liquidity... (excess petro-dollars, excess sino-dollars, excess saving in the rest of Asia) that investors have been overly optimistic in lending money and buying stocks. In other words, they’ve taken on way more risk than they’ve thought...

The biggest speculative bubble has been in China – which isn’t surprising given the growth of China’s economy and the under-regulation of its financial markets. Because global financial markets are so intertwined, that bursting bubble has hurt investors all over the world. ...

There have been other excess-liquidity speculative bubbles right here in America, too. One prime example has been sub-prime loans... When the housing market started to tumble, some of these risky loans have revealed just how risky they are.

Another liquidity bubble has emerged in hedge funds and private-equity funds, which have so much money they’re buying up whatever they see. When these bubbles burst, the noise will be loud enough to shake foundations from New York to San Francisco.

The wake-up call this time was Alan Greenspan, the Oracle of Ayn Rand, whose visage had been beamed by satellite to a group in Hong Kong on Monday (New York time). Greenspan warned the gathering of excess liquidity in global financial markets, leading to over-optimism, and he predicted a recession later this year.


Too early yet to tell how big this explosion will be.

Also from Robert Reich: Time to Join a Union (Or At Least Have the Right To).

    Posted by on Wednesday, February 28, 2007 at 01:15 PM in Economics, Financial System | Permalink  TrackBack (0)  Comments (39)


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