Òscar Jordà, Moritz Schularick, Alan Taylor — Leveraged bubbles

The risk that asset price bubbles pose for financial stability is still not clear. Drawing on 140 years of data, this column argues that leverage is the critical determinant of crisis damage. When fuelled by credit booms, asset price bubbles are associated with high financial crisis risk; upon collapse, they coincide with weaker growth and slower recoveries. Highly leveraged housing bubbles are the worst case of all.

Ya think?

Conclusions: Bubble trouble

In this column, we turned to economic history for the first comprehensive assessment of the economic risks of asset price bubbles. We provide evidence about which types of bubbles matter and how their economic costs differ. Our historical analysis shows that not all bubbles are created equal. When credit growth fuels asset price bubbles, the dangers for the financial sector and the real economy are much more substantial. The damage done to the economy by the bursting of credit boom bubbles is significant and long lasting.

In the past decades, central banks typically have taken a hands-off approach to asset price bubbles and credit booms. This way of thinking has been criticised by some institutions, such as the BIS, that took a less rosy view of the self-equilibrating tendencies of financial markets and warned of the potentially grave consequences of leveraged asset price bubbles. The findings presented here can inform ongoing efforts to devise better macro-financial theory and real-world applications at a time when policymakers are still searching for new approaches in the aftermath of the Great Recession.

VOX.eu
Leveraged bubbles
Òscar Jordà, Moritz Schularick, Alan Taylor
ht Lambert Strether at Naked Capitalism

Steve Roth — The Global “Capital” Glut

What Bain capital has to say about the global capital glut.

So what about Bain Capital, Romney’s shop? Here from their December 10, 2012 report (PDF; hat tip to the always-remarkable Izabella Kaminska, and to Climateer Investing).

World awash in nearly one quadrillion of cheap capital by end of decade, according to new Bain & Company report
Their takeaways include:

The capital glut will be accompanied by persistently low real interest rates, high volatility and thin real rates of return. 

Sound like secular stagnation to you?

 Also:

The ever-present danger of asset inflation will contribute to an overall steepening of the investment risk curve… companies will need to strengthen their bubble-detection capabilities

In short, there’s a huge amount of money floating around out there relative to income and production. (In Steve World, all financial assets embody money, and the money stock is the total value of financial assets — including dollar bills, deeds, or other formal financial claims — regardless of how currency-like those things are. Equating currency and currency-like things with money is conceptually incoherent.)

This is an excerpt. If this is your interest, read the whole thing and follow the link at the end.

Hint: it’s about what the herd does with all that money.

Asymptosis
The Global “Capital” Glut

Steve Roth

Yves Smith — The BIS Loses Its Mind, Advocates Kicking Citizens and the Bond Markets Even Harder

Lots of good stuff, including Fed policy and its consequences.

Naked Capitalism

The BIS Loses Its Mind, Advocates Kicking Citizens and the Bond Markets Even Harder
Yves Smith