BUBBLES….Brad DeLong recommends this Wall Street Journal article about the origins of the current credit bubble, and it was indeed interesting. And yet, I can’t help but think that in the search for specific causes of the current subprime mortgage mess we miss the forest for the trees — again. Sure, the current housing bubble is pretty obviously credit driven, but really, aren’t all bubbles? And they come along with some frequency these days, always with some shiny new reason for bankers to become irrationally exhuberant. Just in the last couple of decades we’ve seen bubbles in S&Ls (safe as houses!), South American countries (sovereign states never default!), junk bonds (greed is good!), dotcoms (eyeball, not profits!), and now housing (safe as houses!). Every time, it turns out that there’s nothing new at all. The economy has not been fundamentally changed, risk and reward are still roughly proportional, profit still drives stock prices, and supply and demand still function about the same way they always have.
And there’s one other thing that always stays the same: the object of the particular bubble that’s just burst comes under increasing scrutiny, but nothing is ever done to try to address the underlying issues in the finance industry which, left to its own devices, will simply move along and create a new bubble somewhere else in a few years. Maybe there’s nothing that can be done. I don’t know. But I imagine that this time around home mortgages will come under some kind of mild additional scrutiny, reminding one of fables about horses and barn doors, and the titans of the finance industry will shrug, lay low for a few years, and then become mesmerized by yet another shiny new toy. If we’re lucky, it will be a bubble in green technology, and maybe we’ll all actually get something good out of it while it lasts. Cross your fingers.