The problem is not that financial markets are too mature and able to create too much capital and credit. The problem is that the corporation is too immature and unable to create profitable opportunities using that capital and credit. The result? Capital bids up the price of existing assets and we have a series of bubbles. Policy makers looking at financial markets will only see the symptom of this problem. We need to start talking about corporate reform.
James Fallows of the Atlantic talked to Nouriel Roubini, who spoke about the danger and increasing severity of economic bubbles.
“These asset bubbles are increasingly frequent, increasingly dangerous, increasingly virulent, and increasingly costly,” he said. After the housing bubble of the 1980s came the S&L crisis and the recession of 1991. After the tech bubble of the 1990s came the recession of 2001. “Most likely $10 trillion in household wealth [not just housing value but investments and other assets] has been destroyed in this latest crash. Millions of people have lost their jobs. We will probably add $7 trillion to our public debt. Eventually that debt must be serviced, and that may hamper growth.”
After talking about the dynamic of bubbles and how we've been dependent on them for growth, Roubini says,“'The question is, can the U.S. grow in a non-bubble way?'” He asked the question rhetorically, so I [James Fallows] turned it back on him. Can it?"
For me, the core problem is that we’ve created massive potential for financial stimulus but have not created a corresponding potential for translating that into new ventures. So, the financial clout is used to bid up the prices of existing assets rather than create new ones. This can’t help but create a series of bubbles, it seems to me. The problem is not that financial markets are too capable of creating capital. The problem is that business markets are too feeble at using that capital to fund innovation.
Businesses are not that interested in innovation and creativity. They prefer predictability. This is typical of fiefdoms run by the last of the monarchs. The dispersion of power within corporations to employees who would be eager to create equity would not only result in more innovation but would require more capital. Financial markets are capable of creating the credit and capital to finance new ventures at a faster rate: corporations don’t avail themselves of this, more often than not generating cash rather than consuming capital as if they did not operate in a possibility-rich environment.
As long as capital markets are biased towards the purchase of used securities – buying stocks and financial instruments for investments already created – we’re likely to see a series of bubbles. Once we get better at making entrepreneurship a normal part of the daily routine of business, we’ll still have bubbles but I suspect that they won’t be nearly as frequent or pernicious. And the foundational economy upon which financial markets rests will be more diversified and vibrant, offsetting the bubbles that do occur.