pollock - boom & bust; financial cycles and human prosperity (2011)

[...]...ALEX J POLLOCK To understand our current economic downturn, we need to see clearly the contrast between Jean and Chantal’s approaches and gain a longer-term perspective on what happens when the free market thrives and what happens when market manipulation and short-term fixes undermine long-term growth Alex J Pollock provides this perspective in Boom and Bust: Financial Cycles and Human Prosperity, ... discuss, government action both helped cause the twenty-first-century housing bubble and made it worse.) 12 ALEX J POLLOCK While the dynamism and innovation of market economies engender recurring financial bubbles and crises, they more importantly contribute to the trend of increasing human well-being Economic cycles are not like roller coasters that go up and down but always return to the same place Rather... innovations will succeed and which not, and to what extent The only test is the marketplace, which arrives at the correct answer over time through a process of experimentation Because of the inescapable limitations of human nature and of what the human mind is capable of predicting and knowing, we often overreact spectacularly in the short run—hence the recurring fi nancial cycles 09 BOOM & BUST In 1873, the... always, that it is only the beginning of a greater prosperity They altogether [and all together] over-estimate the demand… They all in their degree and the ablest and cleverest the most—work much more than they should, and trade far above their means Every great crisis reveals the excessive speculations of many houses which no one before suspected, and which commonly indeed had not begun or carried... sustainable economic growth And, armed with this knowledge, we’ll be infinitely more likely to contribute to positive change in our country and our world Only when we learn to see business opportunities and the free market, even with its inherent risks and fallibilities, as a place where the greatest social change can occur can people like Jean and Chantal and you and me—transform communities Pollock s call for... loans State and local governments could collect higher property 15 BOOM & BUST taxes on houses with higher assessed values Investment banks packaged together mortgages into “mortgage-backed securities” and “collateralized debt obligations” that could be sold on international financial markets, and in the process earned very large profits The bond-rating agencies were paid fees to rate mortgage-backed securities... but undermined longterm and sustainable growth Drawing on over thirty-five years of banking experience, Pollock gives us an inside look at what fueled the latest economic crisis He not only identifies the players, he also explains why, time after time, smart shareholders decide to stake their XIII BOOM & BUST money in risky investments, and why so many of the most astute business and government leaders... fashion, and a recession followed In the bursting of the “Dotcom Bubble,” the technology stock index lost nearly two-thirds of its value and almost a decade later still trades at only half its bubble peak So, the United States, in succeeding decades, had first the equity bubble and bust of the 1990s and then the housing bubble and bust of the 2000s Japan, in the 1980s, had a simultaneous equity and housing... bubble expands, the belief in the ever-rising price of the favored asset seems to be confi rmed by success on all sides As long as the asset price keeps rising, everybody makes money This strengthens the belief and helps keep the bubble inflating With house prices rising rapidly for years, everybody— borrowers and lenders, brokers and investors, speculators and house fl ippers, home builders and home buyers,... living standards and national wealth in a market economy Notwithstanding numerous fi nancial crises, people today live 06 ALEX J POLLOCK better than their parents, far better than their grandparents, and vastly better than their more distant ancestors They live longer, are healthier, eat better, are better educated, work in less dangerous and arduous jobs, more easily afford basic necessities, and have more .