Podium: A classic boom waiting to bust

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The Independent Culture
MY FELLOW economists, or most of them, are unnaturally quiet. They are so because in good times the economic voice is always muted. John Maynard Keynes, in a notable passage, made the point. Looking forward to the day when the economic problem is solved (or it might so seem), the economist, he said, would become just another useful citizen, rather like the dentist. Nothing so gives voice to the economist as economic disaster. Of the possibility of this professional redemption I will speak.

In important parts of the world there is, indeed, now economic disaster. The worst of this is in the newly industrialised countries of East Asia. Much, as in the particularly adverse case of Indonesia, is being attributed to the errors of economic youth. This may be partly true, but no one should suppose that it is the final word. One of the truly serious cases is Japan, the world's second largest economy and one of relatively mature years. And there is now the emerging weakness in the well established economy of Hong Kong.

There is more here than youth; there is also a basic characteristic of the market system. You must now speak always of the market system: the word "capitalism", once the common reference, has acquired a deleterious Marxian sound. The deeper fact is that good times can lead on to a speculative mood; that is a cover for destructive behaviour - for economic and financial conduct and action that destroys the very prosperity that gave it cover.

There is nothing new about this; it has been a recurring phenomenon for much of the millennium just past - from the tulip mania of Holland in 1637, to John Law's still undiscovered gold mines in Louisiana in 1720 and, for any British audience, the experience in the same year of the South Sea Bubble. The latter name, I would note, underplays the drama. The true speculative imagination in that case centred on a company to drain the Red Sea, thus to recover the treasure left at the passing of the Israelites. The stock of the company had a very good run.

One goes on in the last century to speculative episodes at roughly 30- year intervals, mainly in the United States, and to the culminating crash of 1929. There have been lesser but still painful episodes since. So the question arises inescapably - what now? It is a question that all concerned and pleasantly solvent citizens should have in mind. I do not make predictions; only my wrong ones, I've discovered, are reliably remembered. There is, however, a reality here that even the most circumspect orator can address.

Any period of prosperity, any time of high income, general well-being, can be a euphoric cloak for destructive tendencies. These the ensuing recession or depression, however denoted, then exposes and eliminates. The heroes of the boom are the condemned of the crash.

All this has been true of the past. It could be true of the present. In these last years we have had, first in Japan and now in New York and Wall Street, clear manifestations of the speculative mood.

That mood is wonderfully invariable. Securities prices or commodity prices or real estate values are going up; individuals and their financial agents and advisers are attracted. They buy - it is said, to invest. This causes prices to go up further; expectations are thus justified by the very action that was induced by the expectation. This is the classic speculative bubble. It builds on itself and it does not come gently to an end. There may be a period of hesitation, then a sudden rush to reality.

We have recently been witnessing such a speculative increase. It has reduced the dividend yield on the securities of the more favoured companies on the New York Stock Exchange to purely nominal levels. We are also seeing - a common feature of the speculative boom - an explosion of corporate mergers and acquisitions. It is not supposed that these increase efficiency; few now cite the ancient classical goal of monopoly power. Primarily the mergers and acquisitions serve the prestige, the ego, of those promoting or guiding them and, it is hoped, the market value of the stock. Further, a large number of self-confessed financial experts, some self-identified as financial geniuses, have appeared. They guide those seeking thought- free enrichment. The highly visible manifestation is the mutual fund. We now in the US have far more mutual funds than there is intelligence, perhaps even integrity, to handle them. They are the bridge between the innocent and the eventual loss.

Most important, let there be an understanding of the speculative mood and the disaster it can engender.