When Irrational Exuberance Turns Into Clinical Insanity: The Crash Of The "Super-Bubbles". 

by: Harley Schlanger

Alan Greenspan - dreaming of bubbles...

Jan. 28 -- On January 20, Jeremy Grantholm, founder of the asset management firm GMO, warned that a "superbubble", comprised of stocks, housing and commodities, will soon pop, wiping out $35 trillion in assets. This would be the fourth superbubble collapse in the last one hundred years, he said, citing stock bubbles which imploded in 1929 and 2000, and the housing bubble in 2008. 
He stated that:
"...we face the largest potential markdown of perceived wealth in U.S. history."  However, no one is listening, he complained, because superbubbles "are often the most exhilarating financial experiences of a lifetime."  Among those not listening, he identified the U.S. Federal Reserve and the other central banks, which he reports do not "seem to recognize the danger.

As if to prove his point, {Bloomberg Business} ran as its headline for its lead story on January 27, "America's Economy Is Booming", citing statistics which show a "better-than-expected" GDP growth in the latest quarter. Further down in the article was a mention of the decision taken at the Fed Open Market Committee earlier that day, to move ahead, finally, with "tapering", scaling back the Quantitative Easing program and raising interest rates. It reports ominously, "Traders are bracing for higher borrowing costs, with money markets now expecting almost five interest-rate increases from the Federal Reserve this year and another four from the Bank of England." This unacknowledged contradiction, of the disconnect between the "good news" of a growing GDP -- which measures monetary expansion and not goods production of the real economy -- and the fears of the effects of an interest rate spike, demonstrates precisely why the Fed and others cannot "recognize the danger."

Backing Grantholm's view are a spate of articles and reports on the unsustainability of various forms of debt, especially of the danger of default among poor, heavily-indebted countries. David Malpass, President of the World Bank, warned that the "risk of disorderly defaults is growing....Countries are facing a resumption of debt payments at precisely the time when they don't have the resources to be making them." Larry Elliott, financial correspondent for the {Guardian}, elaborated on this in his January 23 column, writing that debt payments by developing sector countries have more than doubled since 2010, and will increase more if the Fed raises interest rates. In 2010, 6.8% of government revenues went to debt repayment; in 2021, this rose to 14.3%. There are fifty-four countries in a "debt crisis", and nearly 50% of that debt is owed to private lenders, that is, banks and investment funds -- including those where many people have placed their retirement and pension funds -- and another 27% to institutions such as the World Bank and International Monetary Fund.

Further, reports proliferate of the accelerating rates of delinquency in personal debt, such as home mortgage payments and credit cards, while the website www.wallstreetonparade.com has been documenting that the Federal Reserve has been pumping trillions of dollars into the major private banks -- such as JP MorganChase, Goldman Sachs and Citibank -- since the 4th Quarter of 2019, through the Repo lending window, to prevent a collapse of corporate debt, or a chain-reaction default on derivatives.

What Is "Irrational Exuberance"?

At a time when stock valuations were soaring in the mid-1990s, Federal Reserve Chairman Alan Greenspan delivered a speech to the free market fanatics of the American Enterprise Institute (AEI) on "The Challenge of Central Banking in a Democratic Society". In his speech, on December 5, 1996, he spoke of the overall favorable climate for continued appreciation of stock values, referring to a combination of low interest rates and low inflation. He then asked, "But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?"

In attempts to untangle typical Greenspan Fedspeak, this was interpreted as a dismissal of such a concern, designed to continue to fuel speculation, while offering a cover in case the stock bubble did pop, as it had in October 1987 in the same week he became Fed chairman. The speech to the AEI came at a moment of euphoric belief in "American Exceptionalism" and the U.S. as the unipolar Superpower, bolstered by the "victory" in the Cold War, which U.S. leaders hailed as a result of the unparalleled strength of the U.S. military, and the limitless economic potential fueled by the wonders of a "free market" economy, which the U.S. was celebrating as the successful transition from a "heavy" industrial economy to a "new (weightless) economy". The "weightlessness" refers to an explosion of funds flowing into "new financial instruments", the vast majority of which had little or no tangible assets to back up their trading value.

Greenspan's attempt to dismiss the dangers inherent in this shift should have been definitively shattered by events of the next years. In 1997, the speculative bubble in Asian stocks and real estate popped, as currency exchange speculators, led by George Soros, rushed in to rake in profits. In 1998, the collapse of the Russian GKO bonds led to a devalued ruble, default on domestic debt, a moratorium on foreign debt payments, and a near-collapse of leading U.S. banks, requiring a bailout fund organized by the Fed of more than $16 billion. This was largely due to the effort, run by western financiers, to impose on Russia an economic transformation through "shock therapy", which was a thinly-disguised looting operation, dismantling Russia's physical economy and making it dependent on raw material exports. The economic and demographic collapse which followed brought Vladimir Putin in as acting President in January 2000; he has devoted the last two decades to reversing that collapse, with an emphasis on rebuilding Russia's scientific tradition.

Most devastating to Greenspan's attempt to dismiss the danger of this transition in the U.S. was the collapse of the dot-com bubble, which occurred beginning in the fourth quarter of 2000. He addressed this by creating a new bubble, with an emphasis on trading mortgage-backed securities and derivative transactions, which then collapsed spectacularly in September 2008. Greenspan, who left the Fed in 2006, admitted in October 2008 -- after the collapse of the housing bubble -- that he had "found a flaw" in his model, but offered an excuse. As a bubble develops, he rationalized, "almost everybody is bullish, expects the market to go up, and is fully committed....This is the reason," he explained, "why everybody missed September the 15th, 2008" referring to the day of the collapse of Lehman Brothers.

Not Everybody "Missed" It

Among those who did not "miss it" was former German Chancellor Helmut Schmidt, who told the {Welt am Sontag} on August 1, 1999, that "many people are enthusiastic about the United States [economy]. But these people do not realize that the stock market boom is totally over-valued, and that there are psychopaths who are driving the stocks upwards."

The most clear and consistent critic of the advent of the modern bubble economy was American economist and statesman Lyndon LaRouche, who called attention to this in the late 1960s, then famously in his attack on the August 15, 1971 decision by President Nixon to take down the post-war Bretton Woods system. LaRouche, who was responsible for advances in understanding the method behind the success of the American System economic model, applied the scientific/philosophical approach of the German genius Gottfried Leibniz, to develop his conception of "physical economy".

For example, as the Dow Jones stock average and profits from mutual funds were soaring in 1999, driven by wild investments in the tech bubble of the dot-coms, LaRouche wrote on August 14, 1999, that this "is not to be seen as a sign of prosperity, but directly the opposite. This so-called 'boom' -- in financial asset price hyperinflation -- is actually the highly-elevated fever that signals, and will bring about the financial system's approaching collapse." Shortly after he wrote this, the dot-com bubble began a rapid and deep unwinding.

LaRouche's prescience was again seen in a July 25, 2007 webcast, when he stated that the present financial system, driven by the mortgage-backed securities bubble, "can not continue to exist under any circumstances, under any Presidency, under any leadership, or any leadership of nations. Only a fundamental and sudden change in the world monetary financial system will prevent a general, immediate chain-reaction type of collapse. At what speed we don’t know, but it will go on, and it will be unstoppable! And the longer it goes on before coming to an end, the worse things will get."

Following the 2008 meltdown, he offered a specific approach to reversing the ongoing downward plunge resulting from the adoption of British neoliberal policies in the name of "share-holder values", which repeatedly create bubbles which benefit the super-wealthy, while devastating the real economy. He presented his idea for a global bankruptcy reorganization in an address to the Rhodes Forum on October 9, 2009.

"I have picked out four nations [the U.S., Russia, China, India], as absolutely crucial, that they must cooperate, because with their cooperation, and with that of others who join them, it will be possible to take reorganization of the world economy, by eliminating financial derivatives—just cancel them; they're worthless paper, cancel them. Go back to the honest debt of nations, go to a commercial banking standard, and create new credit to replace the worthless old debt. By creating new credit, and launching physical production programs, in infrastructure and other terms, we could, by agreement among nation-states, prevent a general collapse, and actually launch a program of orderly recovery. And these problems that we now face could be solved."

He continued:

"The problem is, that the world is dominated by financier interests, which are essentially parasitical in character. Our industries, our agriculture, our infrastructure is decaying, worldwide—especially in the Americas, especially in North America, and especially in Western Europe. Western and Central Europe is a disaster area. They no longer have national security, economic security: They're dominated by the British, entirely, under the British system, which was established in the context of the breakdown of the Soviet Union and East German economy.
"At that point, the British succeeded, with the support of [French President François] Mitterrand, and with the support of George H.W. Bush, the President at that time, in imposing upon Germany, and other nations of Western and Central Europe, conditions which are destructive. And the Western European economy is generally bankrupt, today, hopelessly so. It could be reorganized, through bankruptcy reorganization, but presently the whole system of Western and Central Europe is hopelessly bankrupt, as other parts of the world are."

The present crisis can only be solved by adopting LaRouche's unique approach, based on restoring the principles of "physical economy", and rejecting all forms of British, neoliberal monetary schemes. It is not just "Superbubbles" which are collapsing, but the entire system, which is built on the ideological delusions of those billionaire predators running it, and profiting from it.

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  • Malene Robinson
    published this page in Harley Updates 2022-02-02 13:07:03 -0500