Two Items in this Special Digest

Items.
Item 1: Double-Bubble, and Oil and Trouble.
Item 2: Dealing with Depression

Item One: "Double-Bubble and Oil and Trouble".

This Centre Essay, "Double-Bubble and Oil and Trouble" takes a long  
look at the history of speculative bubbles, beginning with  
Tulipomania, and finds that any speculative bubble in goods or  
services generates "financial excesses" as financiers rush to provide  
funding to support the speculators. Once the bubble bursts the  
financiers tend to collapse too, taking their investors' savings with  
them.

So the policy objective should be to stop such bubbles in goods and  
services ever forming, or, given they have a certain inevitability, to  
make sure they are short-lived, and so prevent the financial feeding- 
frenzy causing too much collateral damage.

We all understand that a sharp increase in demand for goods and  
services initially causes prices to rise. So a sudden increase in  
immigration into a city will cause house prices to rise. But in a  
lightly-regulated market developers will soon increase supply and  
prices will settle.
This is the normal interaction between demand, price and supply. Such  
price rises and falls are normal cycles in the marketplace.

However, if for some reason, the market cannot respond to the increase  
in demand, then prices will continue to rise and investors will come  
to believe that the prices will continue to rise for ever, and a  
speculative bubble is born – investors become speculators. Normally  
price rises drive demand down so if they don't there must be some  
increasing constraint on supply. Of course most of the investors and  
the financiers who support them actually know how markets operate, so  
they soon become advocates for continuing constraints on supply.

Housing is particularly prone to this "unholy alliance" because so  
many people in positions of power own real estate, especially in the  
US, Australia and New Zealand. Of course all such bubbles must burst  
because eventually the excessive prices drive down demand as people  
stop buying or migrate to more affordable markets. Once demand  
pressure eases, both bubbles deflate. In the end, markets settle.

The Centre Essay Begins:
Double-Bubble, and Oil and Trouble.    

(Double, double toil and trouble;
Fire burn, and cauldron bubble –Macbeth)

Now that the 'oil bubble' seems to be deflating alongside the housing/ 
finance ‘double-bubble’, many people are wondering whether the oil  
bubble was driven by speculators or by ‘real’ issues of supply and  
demand. Having been commenting on housing bubbles for the last ten  
years I have learned something about the behaviour of past bubbles,  
and why they inflate and why they burst. One of the first lessons is  
that people’s response to any particular bubble is determined largely  
by whether they are on the winning or losing side of the boom. (More– )

Item Two: "Dealing with Depression"

This is the title of our recent NBR column that sets out some actions  
needed to be taken to help our otherwise flexible and responsive  
economy climb out of the recession caused by the collapse of the  
housing/finance 'Double- Bubble".

It begins:

Elections are normally fought over policies and personalities, but  
governments are judged by how they deal with unexpected events – such  
as the Thatcher Government’s response to the Falklands War.
So far, in our own election campaign, our competing parties are  
focusing on their policies and personalities, but the voters may soon  
be more interested in how they plan to deal with the emerging threat  
to almost everyone in the electorate. I am referring to the collapse  
of the housing/finance double-bubble which has already thrown our  
economy into recession and which may well drive us into long-term  
depression. The two bubbles have fed off each other in a cancerous  
symbiotic relationship.
The present Government will find it difficult to develop suitable  
remedial policies because they would have to admit error and accept  
some responsibility for the inflated housing bubble and the consequent  
generation of a frenzy of lending and borrowing against over-valued  
assets. (More – )