1/6
We'll see a lot more of this over the coming years. One of the consequences historically of long-term growth bubbles is the ways in which they systematically distort the behavior of financial institutions, businesses, households and local government.
caixinglobal.com
We'll see a lot more of this over the coming years. One of the consequences historically of long-term growth bubbles is the ways in which they systematically distort the behavior of financial institutions, businesses, households and local government.
caixinglobal.com
2/6
These entities learn over the years that those who speculate most aggressively on rapid growth, easing credit conditions and soaring asset prices will greatly outperform their more prudent peers, and will be widely praised by the press and government for their foresight.
These entities learn over the years that those who speculate most aggressively on rapid growth, easing credit conditions and soaring asset prices will greatly outperform their more prudent peers, and will be widely praised by the press and government for their foresight.
3/6
They also quickly learn that those who cut regulatory corners – for example by overstating the value of assets – will almost never get caught because market conditions will bail them out, and in fact they'll often be praised for their intelligent risk-taking.
They also quickly learn that those who cut regulatory corners – for example by overstating the value of assets – will almost never get caught because market conditions will bail them out, and in fact they'll often be praised for their intelligent risk-taking.
4/6
The result is that the operations and balance sheets of the economy and its financial institutions become caught up in a massive sorting mechanism that favors aggressively speculative and risk-taking behavior at the expense of more prudent behavior.
The result is that the operations and balance sheets of the economy and its financial institutions become caught up in a massive sorting mechanism that favors aggressively speculative and risk-taking behavior at the expense of more prudent behavior.
5/6
That is one of the main reason why, at the end of a long growth bubble, we always "discover" that the economy is far more susceptible to a contraction than we had expected, and that a large number of financial institutions have violated regulatory limits.
That is one of the main reason why, at the end of a long growth bubble, we always "discover" that the economy is far more susceptible to a contraction than we had expected, and that a large number of financial institutions have violated regulatory limits.
6/6
The temptation is to blame this on individual greed and fraud, but it is an almost-inevitable consequence of a sorting system that over the medium and long term rewards excessive risk-taking and punishes ordinary prudence.
The temptation is to blame this on individual greed and fraud, but it is an almost-inevitable consequence of a sorting system that over the medium and long term rewards excessive risk-taking and punishes ordinary prudence.
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