Why Speculative Bubbles Still Occur: Limits to the Rationalization of Finance Capitalism

Introduction (Via Abolafia @ Alberta.ca)

This paper will argue that advanced industrial societies have the knowledge to prevent crippling speculative bubbles like the housing bubble of 2008. But it will also argue that we are unlikely to put an end to such man-made disasters. The reason, I will show, lies less in our understanding of the economics of speculative bubbles than it does in our understanding of the institutional factors shaping the formulation of economic policy. It is not a failure of knowledge about our economy, rather it is a failure of knowledge about our society. It is a failure to understand the extent to which economic policy is a reflection of ideological assumptions. More specifically, it is a failure of the powerful institutions captured by this ideology in which our societies put their trust.

The causes of the failure lie in these institution‟s susceptibility to and unreflective reproduction of vested interests and rationalizing ideologies. So, even though the conditions that engender speculative bubbles may be understood, critical institutions are resistant, even opposed, to inhibiting them. This paper identifies three institutions in particular whose failure is necessary for bubbles to have disastrous societal effect. These are the profession of academic economics, the ruling political discourse of the era, and receptive regulatory structures. The failure of these institutions calls their legitimacy into question. It also suggests that the solution to speculative bubbles lies in the difficult path of radical institutional change.

Interesting Excerpt (Via Abolafia @ Alberta.ca)

In the end, I fear that despite the housing bubble of 2008, we have not seen the end of market fundamentalism in the U.S. It is too deeply embedded in the individualist culture and political rhetoric of America. The inertial strength of this discourse may be seen in the current political difficulties of the Obama administration in the areas of health, energy, and the environment. Institutional factors, as we know, don‟t change easily. Major changes in economic policy call for shifts in academic economics and regulatory practice supported by an institutional entrepreneur with consummate rhetorical skill and impeccable timing. At this point, radical institutional change does not seem probable.

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18. January 2010 by Miguel Barbosa
Categories: Curated Readings, Finance & Investing | Leave a comment

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