Friday, September 3, 2010

Why Bubbles Happen

A good, concise, summary of why bubbles happen:

"[M]ultiple drivers converge and feed on one another and then all invert at the same time the (panic).  An asset class has a few years of positive returns, leading to a perceived lowering of risk allowing for greater leverage allowing more people to buy into the newly discovered "money machine" asset class. Read Kindleberger [Manias, Panics, and Crashes: A History of Financial Crises] to really appreciate how common this is."
Kindelberger's book changed my life. It gave me absolute confidence that there was nothing the government or the Fed could do to stop a deflationary collapse of the massive credit bubble. (Hence the name, Credit Bubble Stocks.)

The only thing the government or a country's central bank can do is the hardest thing - stay out of the way. Warren Harding did this during the recession of 1920-1921 and it worked. But that was a simpler time, when people cared, for example, whether the bank where they deposited their money was solvent or not.

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