Monday, September 28, 2009

Andy Xie on Bubbles

Andy Xie is a well respected analyst. His article is a sobering look at the most recent bubble. Follow the link to his article. His summary points include the following:

"The basic conclusion is that financial sector debt is the same as it was a year ago, and the reduction in leverage is due to equity base expansion, partly due to government funding..."

"Second, financial institutions are operating as before....What's occurring now is another bubble that is again redistributing income from the masses to the few...."

"Third, financial supervision has not changed....The developments in the past year have actually made financial supervision worse. To support financial institutions, the U.S. government suspended mark-to-market accounting rules for assets on the books of financial institutions, which has allowed them to report profits...."

"The U.S. government sent many more to prison in the 1980s after the junk bond bubble burst. This bubble is 10 times bigger..."

"The lesson from the Lehman collapse seems to be, 'Take whatever you can and, when it crashes, you get to keep it.'"

"Only a multiplier effect from the current bubble is stopping financial institutions from going under...Essentially, the main short-term impact of the current bubble is preventing the financial system from collapsing. It won't lead to substantial demand creation."

"The environment for tolerating such a loose monetary environment ends when inflation surges in emerging economies first and developed economies second.
When inflation becomes a political problem and policymakers are forced to respond, money supplies will be cut. After that, no more bubbles."

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