9◼ REMARKS Bloomberg Businessweek December 23, 2019
theeconomiesoftheU.S.andotherwealthynationscanno
longergrowwithoutproducingdestabilizingbubbles—spikes
inassetpricesunjustifiedbyfundamentals.Or,worseyet,
whetherthebubblesthemselvesarecrucialtogenerating
economicgrowth.
Thecircumstantialevidencefora dysfunctionalrelation-
shipbetweeneconomiesandbubblesis troubling.Thelast
timetheU.S.joblessrategotdowntoalmostaslowasit is
nowwasthelate1990sand2000.Thatboomwasfueledby
a maniaofinvestmentintelecominfrastructureanddot-
comstartupsthatendedabruptlyattheturnofthecen-
tury,whenglutsformedandpricesgottoohigh.Thebubble
popped.Growthwasrescuedbya surgeofoverinvestment
inhousing,whichwaspumpedupbystupidorfraudulent
subprimemortgagelending.Thepoppingofthatbubbleled
totheworsteconomicdownturnsincetheGreatDepression.
Nowthefunny-moneycycleseemstobehappeningall
overagain.Interestrates inJapanandWesternEurope
havebrokenbelowwhatusedtobecalled—naively,wenow
realize—the“zerolowerbound.”Economichistorianssay
thisappearstobethefirsttimeinthehistoryoftheworld
inwhichnegativeinterestratesarewidespread.Scholarsof
ancientMesopotamiaareinvitedtosayotherwise.
Whenratesonsafesecuritiesgonegative—orultralow,
astheyareintheU.S.—investorsfeelcompelledtotakeon
greaterrisktogetwhattheyconsideranacceptablereturn
ontheir money.They“reachforyield.”Default-prone
Argentinafoundbuyersin 2017 fora 100-yeargovernment
bond.Greece’s10-yearbondshavefoundtakersatyields
ofjustover1%a year.IntheU.S.,investorsaresnapping
uprisky“covenant-lite” corporate loans that have been
stripped of the protections for lenders that ordinarily dis-
cipline the borrowers.
“I am very worried,” says Mayra Rodríguez Valladares,
managing principal of MRV Associates, a New York-based con-
sulting and training firm for the financial sector. Banks’ asser-
tions that they have plenty of capital and liquidity to withstand
the next downturn aren’t reliable, because “you can’t con-
trol fear,” she says. “When fear takes over, it’s hard to stop.”
Bubbles are not all bad. Sometimes it takes the prospect
of enormous riches to get people to make investments that
end up being good for society, even if the investors lose their
shirts. That applies to canals and railways in the 19th century,
fiber-optic networks in the 1990s, and companies in hot areas
such as drones, batteries, solar power, and virtual reality today.
But bubbles also generate waste. The housing bust left
hundreds of unsightly and unsafe “zombie subdivisions”
across the American West, the Lincoln Institute of Land Policy
wrote in a 2014 report, Arrested Developments. The poor and
working class suffer the most from boom-and-bust cycles,
because they’re the last hired and first fired and are more
likely to invest at the worst time, right before things go bad.
It’s ironic that at a time of low inflation, there’s been riot-
ing in Chile, Colombia, Ecuador, Iran, Hong Kong, Lebanon,
and Sudan over, among other issues, the high cost of living.
A bubble in real estate is one of the incitements to protest in
Hong Kong, which has the world’s most expensive housing.
So it’s natural to ask why this keeps happening and what,
if anything, can be done to take the bubbles out of economic
growth. Former Federal Reserve Chairman Ben Bernanke
partly explained it in 2005 when he identified a global savings
glut: foreign investors, including the Chinese, were pouring
money into the U.S. because their savings far exceeded good
investment opportunities at home. Some of those foreign sav-
ings,alas,werewastedonthosearrestedhousingdevelop-
ments.LawrenceSummers,a formerU.S.Treasurysecretary
andHarvardpresident,hasbuiltonBernanke’stheory with
thenotionofsecularstagnation:a chronic,worldwidelack
ofspendingbecauseoftheagingofsocietyandtheriseof
companies such as Apple, Airbnb, and Google that don’t need
much physical capital. Summers argues that the economic
expansion would ebb if left alone and is being sustained by
governments using artificial means: deficit spending and low
interest rates.
Minsky, the economist who said stability breeds insta-
bility, may have had the most complete diagnosis, even
though he died in 1996, before serial bubbles became a
thing. Building on the work of others, including the Briton
John Maynard Keynes and Michal Kalecki of Poland, Minsky
focused on the financial side of the economy—flows of
money, not just goods and services.
“Profits,” Minsky wrote in 1992, are “the key determinant
of system behavior.” He said financing tends to degenerate
from safe (“hedge”), to risky (“speculative”), to outright irre-
sponsible (“Ponzi”). The Minsky moment—not his term—is the
collapse of prices when people abruptly realize that financ-
ing has become reckless and unsustainable.
There’s a troubling new analysis of where we are today, in
the Minsky tradition, called Bubble or Nothing. The 64-page
report was issued in September by David Levy, chairman of
the Jerome Levy Forecasting Center LLC in Mount Kisco, N.Y.
Levy is a former associate of Minsky and the third genera-
tion of forecasters in his family. A hedge fund he launched
in 2004 to bet on falling short-term interest rates gained
500% for investors before closing in March 2009, shortly
after rates bottomed.
When investors reach for yield, as they are now, it’s because
they “see no other way to obtain financial returns that are
anywhere near their goals,” Levy wrote in Bubble or Nothing.
Pension fund managers, for example, feel they have to take
risks to fulfill promises to retirees. In 1992 public pension plans
assumed they would earn a return of 8%, about what they
could get on 30-year Treasury bonds. Reasonable. In 2012 they
were still assuming they could earn almost 8% a year, accord-
ing to a study by Pew Charitable Trusts, even though the yield
on safe 30-year Treasuries had fallen to 3%. Unreasonable.
The core problem, Levy says, is that household and busi-
ness balance sheets have gotten too big—top-heavy, you might
say. He focuses not only on debt, on the right side of the bal-
ance sheet, but also on assets, which appear on the left.