Liquidity Bubbles: Why they keep happening

Dear reader(s), does the following even make any sense? I wrote this a while ago, and did not post it then. I am not sure. When someone says "I am not an economist, but..." I get suspicious. I even get suspicious of myself.

- J

We have yet to see the end of what has become known as the Subprime Mortgage Scandal. There are apparently many more rocks to turn over. Already, though, the dollar amounts are huge. This is the latest in a series of Liquidity Bubbles: lots of cash with no place to go until someone figures out a way to rationalize very bad investments. The first liquidity bubble in modern times, I think was the Savings and loan scandal of the 80's. To a degree, the dot-com bubble was a liquidity bubble.

I am no economist, but it seems pretty plain to me. Starting in the Seventies we turned over to the Fed virtually all the management of economic cycles. At the same time we began a legislative trend that has had the effect of increasing opacity of economic transactions. "Deregulation" and "Free Trade" are opacity increasing activities. What is the economic value of moving manufacturing oversees? To make invisible exploitation of workers and trashing of the environment.

So when the economy slows down we pump more cheap money into it. This is intended to encourage innovation and new enterprise, and it does, but it also encourages fraud. Especially in a loosely regulated environment, old ideas, like pyramid schemes and ponzi schemes are easy to dress up as new, easier than real innovation. So we have bubbles, ordinary citizens are victimized and the government bails out the villains. And so it will go.

- J