Blowing Bubbles Ain’t Fun Anymore

The present tentative state of the global financial markets is the aftermath of the bursting of the US Housing Bubble and collapse of subprime lending. What people and financial regulators all over the world didn’t expect is that a crisis in such a specific area of finance would domino effect into other financial instruments and has now resulted in inflationary (perhaps hyperinflationary) environments all over the world with commodity prices rising tremendously. I’ve always shared the view that commodities are not treated as “goods” but as essentially hedges against financial downswings of other assets (see previous articles), and although commodities have shaved off some steam, there are few indicators that the financial crisis has finally turned and a recovery ahead.

This is essentially the topic of a roundtable discussion featuring brilliant economic minds Mark Hannam, Jonathan Ford, John Gieve, Anatole Kaletsky, George Soros, and Martin Wolf. Some excerpts to pique your attention:

SOROS:

The size of the financial industry is out of proportion to the rest of the economy. It has been growing excessively over a long period, ending in this super-bubble of the last 25 years. I think this is the end of that era.

KALETSKY:

I can’t resist taking a contrarian view. I think this is a point of inflection, which, if you remember your school maths, can either be a turning point or, as in a cubic equation, a point where things slow down and then re-accelerate. There is, though, still a possibility that the financial system will survive the test. If it does, the appropriate analogy would be not 1929 or even 1973 but what happened in the late 1990s with Long Term Capital Management, whose collapse was followed by an even bigger bubble. I think eventually there will be a bubble that totally blows up the financial system, but we may not be there yet. I don’t see many hedge fund managers driving taxis. And George, you made a lot of money in 2007.

SOROS:

Yes, I did. And if we do pass through this without a hitch you will find that the private equity funds will replace the investment banks as the dominant force in the economy, because they are the ones who are now buying the assets.

Awesome insights from the gentlemen. Check out the transcript of the discussion here.