02 April 2009

Asset bubbles work by insecuring the affluence

What is it about asset bubbles that makes them so compelling? Why is it that when you're in the middle of the bubble it is no longer rational to resist the temptations even though you know you're risking more than you can afford to lose?

It seems that asset bubbles function by wiping out any safe harbors. You are compelled to enter the market because there's no place left to store your value that's not in the market. The last administration's failed attempt to privatize Social Security would have been the keystone to such an de-securing of safe harbors. Had it succeeded, it likely would have extended the asset bubble well into the next administration, or beyond. It would have been as though an enormous investor had suddenly been forced to take his money out of the bank and put it into Bernard L. Madoff Investment Securities LLC. It might have kept Madoff afloat through the meltdown.

Asset bubbles make for insecure affluence by shifting the usual balance from security to affluence. Usually it is easy to find secure stores of wealth while it is hard to acquire affluence. In an asset bubble environment it is easy to acquire the wealth, it is just hard to find where to store it. Given that in a bubble environment all stores of wealth are being degraded, the only rational thing to do is to try to acquire as much affluence as possible, hoping that after the crash you're left with enough to get by on.

'Get rich quick' usually comes with 'it's getting harder and harder to stay rich.' Along with mortgaging away the future for the present comes the problem of mortgaging away the present for the present.

1 comment:

  1. I'm not seeing this line of thinking anywhere else. It's a valuable contribution.