January 13, 2018

Parent regulators, not even aware they were the ones blowing the bubbles, shamelessly put all the blame on their toddler banks when these burst.

Sir, Tim Harford writes: “As any toddler can attest, it is not an easy thing to catch a bubble before it bursts” “Forever blowing bubblemania” January 13.

That is entirely true. But though we should not expect our toddlers to know it, parents are fully aware that the bubbles their dearest are chasing, were blown up by them, in the clear expectation that these would burst, or delightfully disappear in the skies.

Harford concludes in that “It’s very easy to scoff at past bubbles; it is not so easy to know how to react when one may — or may not — be surrounded by one”

Not entirely true, because that should not excuse the case of parents not even being aware they’re blowing bubbles.

In the western world, regulators, for instance, by allowing banks to leverage their equity so much when financing residential houses, are, no doubt about it, blowing up a house credit bubble that will surely blow up in our face… even though we cannot exactly know when that will happen.

When with Basel II in 2004 regulators allowed banks to leverage a mindboggling 62.5 times their capital, only because an AAA to AA rating was present, it should have been clear to them that they were blowing a bubble. Seemingly they did not. Worse, when then the AAA rated securities backed with subprime mortgages exploded in their face, they should have been able to put two and two together, but no, they put all the blame on the banks, the toddlers in this case. Even to the extent of describing the excessive bank exposures to AAA rated assets, or to sovereigns like Greece who with a 0% risk weight they had decreed infallible, as an irresponsible excessive risk-taking by bankers. They should be ashamed!

PS. Like Harford’s senior colleague I was also very skeptical about Amazon’s valuation. In April 1999 I wrote in an Op-Ed that Amazon had “joined the rank and files of ‘tulipomanias’” Yes, I admit, it is now worth much more than it ever was at that time. That said, and though Amazon is now way more than about books, I still suspect that, long term, because of: “‘shopping agents’ will permit clients to quickly compare one company’s prices to those of its competition, which would seem to presage an eventual fierce price wars, would create an environment that is not exactly the breeding ground for profits that back the market valuations we are now observing”.

But then I also assumed institutional “efforts aimed at prohibiting any monopolistic controls of the Web”, and in this perhaps I could have been way to naïve.