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Bruce Banner

What Is A Bubble?

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Bubbles are associated with high prices. But I don't accept that price spikes, or high prices, are a sign that a bubble has blown up.

There has to be a corresponding rise in easily available credit, and that credit must be cheap and/or easily available.

With H2B, you have a classic example of what I am claiming. QE and low interest rates effect on equity prices is another example.

..._

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No use asking an economist. The neoclassical economics orthodoxy has no way of distinguishing sustainable growth from unsustainable growth. No way of modeling a Depression except to characterise it as exogenous. Failed utterly to anticipate the Crash in 2008 and has failed conspicuously to furnish an explanation since.

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Markets are both efficient and irrational. On balance, the efficient works longer-term, while the irrational tends to be flavours of the moment (though how long the moment may be is unknown: we've had an irrational bubble in global population dynamics that's gone almost unchallenged since 1945).

What always makes it worse is when non-market forces interfere. Thus the regular HPC bugbears of bank bailouts and money printing that prevented a healthy (though short-term-painful) correction, and left us a lot of zombies stifling healthy growth. But probably worse still, the perverse incentives in our tax-and-benefits system that housing has never really been a market except at the micro-level where a Rachmann could thrive by finding a profitable niche.

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Bubbles are a symptom of success- the brighter the future looks the more likely people are to gamble on what looks a sure thing- this causes asset prices to rise creating a confirmation bias that leads to further optimistic investments leading to further asset price rises- thus once again confirming the optimistic outlook that is fueling the bubble.

So the answer to the question is simply that a bubble is a self reinforcing cycle of optimism on the part of investors- it's essentially a psychological rather than financial phenomena.

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People are greedy. But greed is naturally tempered by fear. The problem arises with irrational exuberance. Government guarantees, removal of fear, mass of moral hazard.

So with Help-To-Buy, the Government have taken away the fear? :blink:

Not quite.

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Markets cannot operate efficiently because the power to create money is held by a few private institutions.

We do not have capitalism, just socialism for the rich.

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So with Help-To-Buy, the Government have taken away the fear? :blink:

Not quite.

I guess the best way of putting it is that they have made fear and greed have the same result. The fear being 'i'll miss the boat', and removal of logic to decision making.

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Markets cannot operate efficiently because the power to create money is held by a few private institutions.

We do not have capitalism, just socialism for the rich.

Yes, Mr Chimp.We all have to take a gamble, but those in power hold the deck of cards.

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