Economics Questions

Re: What Caused the 2008 Bubble to Burst?

Jargon — Sun, 18 Mar 2012 22:42:54 GMT

Hey Josh,

I'm not sure that ABCT can really speak directly on this issue. ABCT can explain the initiation of a boom which must end, but it cannot explain political decisions, unique market conditions, or the lengths with which people will go to hold on to malinvestments. I think it's possible that those malinvestors didn't choose to reconsider their investments early on because, despite the consistently rising rates, credit was still expanding.

See here: http://www.rawstory.com/rs/2011/07/21/audit-fed-gave-16-trillion-in-emergency-loans/

So my theory on the subject is, lowering the rates initiates a boom. New money raises prices in those areas which are invested in, so people continue to leverage up and reinvest, despite the new cost of borrowing which would have deterred that decision earlier, because of the expectation of appreciation of value in their investments. The low rates 'kick off' the inflationary boom with investments, and then people continue to loan to feed those ostensibly profitable investments? Do you think this is quackery? I didn't know the answer to your question but I just thought about it until I could write this.

Re: What Caused the 2008 Bubble to Burst?

ThatOldGuy — Sun, 18 Mar 2012 22:33:10 GMT

Josh C:
It looks like it should have been a gradual burst from 2004 to 2006.

What you have to remember is that, while we can, as economists, look at certain policies and predict what will happen as a result of them, we are ultimately unable to predict when and to what extent such results will occur. We can discover that a price ceiling set below the market price for a good will result in shortages as demand outpaces supply, but we cannot state that shortages will first arise at time t or that the shortages will consist of a lack of X number of units of A in location Q. Economics is not a quantitative science in that sense.

The same qualifications are attached to predicting a boom/bust period: we can state that when interest rates rise after being held low by the Federal Reserve, the costs of production will be greater than they would have been under the prior interest rates and that allowing them to rise will make many production processes seem unprofitable and end many projects, we cannot logically predict when these projects will end or to what degree they will lose investment if they don't end.

While we may be able to guess when something can happen, we ultimately can only logically prove that something will happen under certain conditions according to certain economic laws.

Hope this helps-

What Caused the 2008 Bubble to Burst?

Josh C — Sun, 18 Mar 2012 21:23:07 GMT

I'm a bit confused on why the bubble that put us in this current recession had burst so rapidly. In my understanding of the ABC, the bubble bursts when interest rates go up, but interest rates went up slowly and before the bubble imploded.

It looks like it should have been a gradual burst from 2004 to 2006.