Saturday, August 13, 2011

Boombustology: Chapter 4

Asset bubbles are frequently popping up, and back down. They are easy to spot in hindsight, but we appear to lack the tools to recognize them ahead of time. Vikram Mansharamani aims to rectify that with his book, Boombustology. He applies a multi-lens approach to understanding bubbles with the aim of giving the reader the ability to identify bubbles, and thereby avoid being caught unaware.

The political environment is a major factor in the culmination of booms and busts. As such, this chapter examines the boom/bust phenomenon through the political lens.

For a boom and bust to exist, property rights must exist. In other words, a particular entity must have exclusive rights to use or sell some asset.

As a result, the author argues that only capitalist countries appear susceptible to booms and busts. In communist countries, the government owns everything so there is no incentive to speculate since there are no profits to be had.

Though many communist countries allow some property rights, often the prices of those assets are fixed. As a result, there is no price volatility. (Although price volatility is avoided, however, there is often volatility in the availability of the assets themselves, since there is no price signal to either encourage or discourage supply and demand.)

Mansharamani then goes on to discuss some political factors that affect the likelihood of booms and busts for countries that fall in between communism and laissez-faire capitalism. When governments place restrictions on property rights, for example, they reduce the incidences of booms and busts. On the other hand, the lifting of restrictions can lead to increases in the chances of booms and busts.

Also, when governments focus on the short-term (as democratic leaders often do, because of their relatively short-term mandates), it can lead to increased distortions that lead to booms and busts. Examples of this are minimum wage laws (which increase unemployment, but which are popular in the short term) and rent controls (which reduce rents in the short-term, to the delight of renters, but cause shortages in the long-term). These distortions increase the likelihood of under/over-investment, which increases the likelihood of booms and busts.

1 comment:

Subu said...

yeah... in communist economies you are in perpetual hunger, starvation and the like ... so thee can't be any boom ...

right ...

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