Thursday, July 3, 2014

Notes from 2013 Conference on 1929, Japan 1980s, Dot.Com Boom & Bust

The Conference began with a warm welcome by Arthur Hoffman the President of the Leir and Ridgefield Foundations. He noted that Bubbles or financial crises are evitable as long as there are banks and markets. However he did not see a bubble as occurring now because there is no optimism as compared to the atmosphere that existed between 2003 and 2007. He then quoted from the Leir Center’s book Boil, Bubble, Toil And Trouble about JP Morgan Chase’s ad for just having to “sign name” to get a home loan mortgage. He then concluded there was clearly a need for raising more cautions when bubbles do appear. 

Bill Rapp from NJIT then introduced the topics for the conference by giving an overview of the three great financial bubbles [1929, Japan 1980s, Dot.Com Boom & Bust] through the analytical lens about bubbles developed in the prior two conferences. His presentation and comments used data on broker loans in 1929 and compared this to the surge in credit issued in Japan during the 1980s. 

He also defined and measured these Bubbles by using the definitions for the different types of Bubbles developed in the previous two conferences, noting role of contracts and the legal system’s support as influencing these bubbles’ evolution including the three-sided optimism of borrowers, lenders and regulators that promoted these bubbles’ expansion and the use of leverage. This optimism created asymmetric incentives to enter into reciprocal contractual obligations where short-term optimism completely overwhelmed a longer-term view of what might happen when an over-expanded credit bubble finally collapsed. This asymmetry included government related actions and policies. 

He noted that in the case of these three great bubbles, the bubbles could have been easily seen even inside the bubble. This is because real asset prices rose sharply and dramatically with leverage also playing an important role in the process. Other contributing factors to the rapid price rise such as contracting were perhaps less clear or not emphasized in the historical record.

Wednesday, April 23, 2014

Bank Regulation In Era Of Globalization And Financial Bubbbles

In this paper the author argues that the regulatory and technological changes that define globalization can be directly linked to particular Bubbles beginning with the deregulation of gold in the 1970s, then Reagan and Thatcher's privatization, Japan's Yen/$ dollar accord, etc. This also explains why the idea of regulating financial bubbles has met so much resistance including Alan Greenspan's since it goes against the prevailing anti-regulation winds of the globalization trend and the prevailing view that free markets know best. 

However the recent financial crisis not only undermines the credibility of this view but also shows why a different bank regulatory approach is required to retain the benefits of globalization and market liberalization while avoiding or moderating the negative impacts from the re-emergence of larger and more frequent Bubbles with global impacts as happened before 1929. 

The Increased Role of Markets and Capitalism in the Global Economic System Should Lead to More Bubbles.

Over the last 35 years there has been a surge in the frequency and size of financial bubbles as compared to the prior 50 years. Robert Aliber, Ron McKinnon and others believe this surge in bubble frequency is due to the large and very mobile global movement of hot capital and its impact especially on smaller economies. However this explanation is not quite complete for while these oscillating flows are clearly a contributing factor they cannot themselves be the initial causes. Leir Center research as well as that of Charles Kindleberger and Hyman Minsky indicate that some dislocation must first create an economic or investment opportunity and this is what attracts both local and international money flows. So an important research question is whether the increased bubble frequency is due to random increases in such events or is part of a larger trend that the hot money follows and with which it interacts.

The Leir Center is starting a research project to show the latter is the case and that the increased frequency of bubbles is due to globalization, that is the identified trend since the early 1980s for a reduction in national barriers to trade, foreign investment and financial flows including among other events the fall of Communism, increased Privatization, and weaker unions complemented by large technological advances in transport and telecommunications. This is because Bubbles are a natural result of markets and capitalism. Therefore it is logical that the increased role of markets and capitalism in the global economic system should lead to more Bubbles. 

It is the intention of this research effort to produce a series or papers and a monograph to demonstrate this development and assess its implications for financial policy. We thus invite comments and ideas from those with an interest. To get this process started the Leir Center has posted working paper #15 on “Banking Regulation In An Era Of Globalization And Financial Bubbles”. In this paper Professor Rapp introduces the argument that the regulatory and technological changes that define globalization can be directly linked to particular Bubbles beginning with the deregulation of gold in the 1970s, then Reagan and Thatcher's privatization, Japan's Yen/$ dollar accord, etc. He also argues this is one reason the idea of more direct regulation of financial bubbles has met so much resistance including Alan Greenspan's because it goes against the prevailing anti-regulation winds of the globalization trend and view free markets always know best. Yet the recent financial crisis not only undermines the credibility of this perception but also shows why a different bank regulatory approach is required to retain the benefits of globalization and market liberalization while avoiding or moderating the negative impacts from the re-emergence of larger and more frequent Bubbles with global impacts as happened before 1929. 

Monday, March 17, 2014

Where Are We In Understanding Bubbles?

Most Bubbles have been identified retrospectively. “Yes, that was a financial Bubble.” Similarly from an historical perspective we can divide our understanding of Bubbles into three major stages, though in all three stages Bubbles have been recognized and analyzed after the fact. These three major analytical stages are Pre-1978; 1978 to 2000; and then after 2000. 

In the Pre-1978 stage financial Bubbles were recognized and assessed as a social or crowd-based phenomenon [Bagehot], even a type of sickness that could affect the masses [Dickens]. There were also detailed descriptions and analyses of specific Bubbles such as the great South Sea, Mississippi, and 1929 Bubbles. Already in the 19th Century Walter Bagehot observed “Much has been written about panics and manias, …; but one thing is certain, that at particular times a great deal of stupid people have a great deal of stupid money; it seeks for someone to devour it; … there is speculation; it is devoured and there is panic.” 


Wednesday, December 18, 2013

2014 Chicago Federal Reserve Economic Outlook Symposium

I was again invited last week to the Chicago Federal Reserve's Economic Outlook Symposium. My predictions last year were 3% real growth, 2% inflation and 7.3% unemployment, considered optimistic at the time but which turned out to be close to the mark though on the low side. My predictions for this year are 3.1% real growth, 1.9% inflation and 6.9% unemployment. 

NJBIZ followed up with me after the conference and wrote the following article on NJBIZ.com.

Monday, October 7, 2013

An Open Letter to the Obama Administration

Dear Mr. President, Secretary Lew, and Chairman Bernanke,

As a way out of the current political and budget disaster in DC, the Administration should - under the Executive Branch's ability to contract and manage the government's assets - consider selling assets to the Federal Reserve. They should begin with the government's hoard of gold, then the National Parks, the National Forest Service, off-shore leases, the GSA, holdings of Foreign Debt, and any other agencies holding real estate or financial assets. They could then use the cash generated to pay down debt. If it needed Constitutional cover beyond its authorities to contract, the 14th Amendment, while perhaps not allowing an increase in the debt limit, would certainly justify a debt pay down.

An additional fiscal benefit would be that once the Fed owned these assets related employees could be put on the Fed's payroll reducing Federal budget expenditures while tax revenues would remain the same. Thus along with the reduction in interest payments the fiscal deficit would be greatly reduced staving off future debt ceiling crises for several years. Further these government employees would now be beyond periodic Congressional machinations. Finally as significant hostage taking ability slipped away the Radical Republicans might be persuaded to act somewhat more responsibly. 

Sincerely, 


Bill Rapp

William V. Rapp
Henry J. Leir Professor
Director Leir Center For Financial Bubble Research
School Of Management
New Jersey Institute Of Technology

Tuesday, June 25, 2013

International Product Cycles, East Asian Growth, And Effect MNE Strategies

[Author: William Rapp, New Jersey Institute of Technology]

The systematic migration or “Flying Geese” pattern of shifting competitive advantage in particular industries from one country to another first proposed by Kaname Akamatsu for the global textile and apparel industries and then extended by Ray Vernon and others to additional industries including steel, ships and automobiles gained much attention in the 1960s through the 1990s as Japan, Taiwan, Korea, the ASEAN Nations, and finally China sequentially entered and exited industries such as textiles, apparel, toys, electronics, steel, ships and cars. However as China has emerged over the last decade and a half as the world’s factory the International Product Cycle or Flying Geese theory seemingly lost its relevance as analysts appeared to assume China’s export competitiveness in low wage industries would continue indefinitely. But perhaps nothing continues indefinitely.

That is more recently China is experiencing the same economic forces in terms of increasing per capita incomes, labor skills, wages, land prices and price inflation as its predecessors such that textiles, apparel and similar low skill low pay industries after first shifting to lower wage areas within China itself are now migrating to lower wage countries such as Bangladesh, Cambodia or Indonesia. Thus China now too seems to be following the same “Flying Geese” pattern.

Click here to download the complete paper.