Union That Leads Charge for Higher Minimum Wage Asks for Exemption from the Minimum Wage

No coincidence; it's herd behavior.

terp said:

tom said:
A little less emphasis on the fault of government intervention and the Fed; a little more on those engaging in the various credit manias.
That's all.

People act crazy during manias. It happens all the time. The riddle is: Why did everyone simultaneously lose their mind? I think its a stretch to say it was just one big coincidence.

Why did hte Dutch suddenly decide tulips were worth so much?

ParticleMan said:

Why did hte Dutch suddenly decide tulips were worth so much?

There was a rapid increase in Money Supply in Holland at that time. This is explained pretty well here by Doug French.

tom said:
No coincidence; it's herd behavior.

Completely spontaneous herd behavior?

Well, why tulip bulbs and only tulip bulbs? Why not ships, cattle, land, art?

In the late '90s, why just tech stocks? Why not commercial real estate, oil futures, tax-free municipal bonds?

It's kind of the definition of a bubble -- a spontaneous rush into one particular asset class. Herd behavior.

An increased money supply isn't enough to explain it.

tom said:
Well, why tulip bulbs and only tulip bulbs? Why not ships, cattle, land, art?
In the late '90s, why just tech stocks? Why not commercial real estate, oil futures, tax-free municipal bonds?
It's kind of the definition of a bubble -- a spontaneous rush into one particular asset class. Herd behavior.
An increased money supply isn't enough to explain it.

Because the high availability of credit causes people to speculate. Speculators chase after returns(greater fool theory). Usually, this starts with people inside an industry. You see positive returns and then the novice investors will jump in. It's essentially the greater fool theory.

I don't disagree that there is herd behavior, but its really chasing profit. There was quite a bit of innovation in the 90's. People looked around and saw places like Microsoft where everyone was becoming millionaires, all levels of employees. Everyone is looking for the next Microsoft, Intel, Cisco. And these stocks went up w/ nary a correction. Remember the Greenspan Put?

So, what do most people do? They try to get on that gravy train. And in a monetary environment with low interest rates and credit readily available, it is easy to get capital for these types of ventures. People who have no clue about technology start working in technology. Resources start pouring into that sector of the economy. People start thinking there is quite a bit of demand for products where that demand doesn't exist. At some point, in bubbles after we've entered the theater of the bizarre, the return on these investments don't warrant the cost of capital. Once this phenomenon reverses itself people realize that asset valuations are completely inappropriate, and you get your bust.

Housing was similar. People still felt burnt from their experience in the tech bubble. People wanted to put their money in something tangible. In addition, we had GSE's, tax policy, etc all available to pull $$ into housing. We also had the attitude that "housing never goes down". Banks fully supported this, and didn't even have the possibility of a housing valuation decline in their models. Where can you get returns on something like this? Well you can loan $$ to home buyers. Spread(hide) the risk and you can get even better returns. Large financial institutions that stayed away from this activity ultimately capitulate because their shareholders wonder why they aren't doing the things that are incredibly profitable for other institutions. The next thing you know, banks are giving loans with no documentation and the Fed Chief is telling people to take out ARMs.

My understanding regarding the Tulip mania(which I didn't live through, so I have to rely on literature I've read) is that Tulips did have fairly significant cyclical price movements that tracked the growing cycle. Add a little speculation. The cyclical rise in tulip prices gets more pronounced. You have novices move in. There was even an options market that developed. You have a long pronounced boom where valuations get higher than ever before.

And today, with ZIRP, QE, what do you hear? I hear people saying things like "Where else can you put your money, but stocks?" You can't put your money in the bank. It gets no interest. You are going to lose purchasing power that way. So, people are chasing returns. And we have all time stock highs. We have all time highs in stock margin. We are at all time highs in debt levels. We have all time highs in Derivatives. As you mentioned art, well yes that market is inflated too. We even have an echo bubble in Real Estate.

And this is the intent of those policies. Create increases in asset prices, and people will feel more wealthy. They will then spend more money. This will result in an increase in aggregate demand. The problem is that this is increasing risk and leverage in our economy. What happens when the party is over?

The key question you need to ask is :Are these assets actually that much more valuable than they were prior? Or are prices being pushed up by rampant speculation due to a large increase in credit? If it is the latter, do you really think this is wise over the long term?

Don't usually comment on these posts, and I am not in agreement in the theory behind the post, but damn Terp, that was a good statement of your position

Thanks Jim! I don't get too much kudos around here, so it's appreciated.

It's funny too, because I was kicking myself for not including what I think may be the most important part.

The way true Capitalism works regarding investment is that people defer consumption and keep that deferred consumption for later. We call this Savings. People save their money and invest it for a capital improvement. Capital Improvements tend to make us more productive. Increased Productivity provides increased wealth, leisure time, etc.

When Savings are plentiful, interest rates will tend to be low. When savings are being lent or spent for investment interest rates will tend rise as Savings becomes less plentiful. Entrepreneurs will judge a ventures worth by looking at interest rates and looking at what kind of return they can expect on investment. As you can see, if savings is being drawn down and interest rates rise, that acts as a regulator to entrepreneurs to slow investment. The interest rate is essentially the price of money.

I think that is pretty straightforward. It's a bit of an over-simplification but is about as good as I'm willing to do on a Message Board post.

So, what happens to this system when some parties don't need to save, but rather have the ability to "print money"? This new money will enter the system and keep interest rates down. If there is a party or parties capable of money printing, they then have the ability to keep interest rates much lower than they would be under a system governed by savings and the price of money.