On Chickens, Eggs and Bursting Bubbles

Here are two bookend quotes to noodle on in contemplating how the financial crisis (ultimately) unwinds:

1. ON BUBBLE CREATION: The key point is that without easy credit creation a true bubble cannot occur. That is why so many bubbles have their origins in the sins of omission and commission of central banks. (Niall Ferguson, writing in December’s Vanity Fair article, ‘Wall Street Lays Another Egg.’)
2. ON THE CHICKEN/EGGS OF RECOVERY: Neither Main Street nor Wall Street can recover until both recover. The “real” economy and the “credit” economy are one and the same: You can’t have real estate transactions or commerce without debt. (Wilbur Ross, chairman of private equity firm, Invesco, in November’s Portfolio Magazine.)

Ferguson’s lengthy, and somewhat uneven article, nonetheless provides a 360 degree overview of the evolution of finance and banking, including the historically recent growth of global debt consumption by both individuals and banks (he calls this period “The Age of Leverage”); Greenspan’s easy-money policy and its impact; the Black-Scholes model of call option pricing and how it provided the "vetted by science" fig leaf necessary to unleash the derivatives industry; and China’s symbiotic role as banker to the United States of America. 

It is both deep and thorough.  Read the full article HERE.

Related Posts:

1. Capitalism 2.0: TED Spreads and Lessons from Japan’s Lost Decade.
2. Death by Derivatives: on economic viruses and financial WMDs.
3. Engine Failure - When Financial Markets Fail: an analysis of the current financial crisis.
4. Black Swans and Bank Runs: on why this crisis was predictable.
5. Financial Tsunamis: connecting the dots in the sub-prime mess.