We always like to think that we are exceptionally smart, or that in our 21st century world that we’ve figured everything out. However, this notion quirky breast down when you realize that for the most part, were just doing what everyone around us does. Although we think each and every one of us is an independent and self thinking person, in reality we just go along with broader trends in society. With this weeks documentary on bubbles in the markets, I think that my biggest reflections are that interfering with the free market will always lead to problems somewhere down the road, and that we really aren’t as smart as we think we are. Thought out this documentary, it did a great job outlining the history of bubbles, and the effect of the fed in the boom and bust cycle. So as I reflect on these examples, I want to specifically not how the fed was the one making the situation worse.
The government will mess it up if it can
To begin with, I liked how they explained how in a modern fractional reserve banking system it is possible to create money out of thin air. Instead of the supply and demand of savings dictating the current rate on money, the fed is able to artificially be a lender and set the market rates that will trickle through the economy. It examined several times where the fed made decisions and how that impacted the rest of the economy. I thought the examples of the housing crash and gold stand to be the best reflection of this idea of the government messing things up. The chairman Allen Greenspan decided that after the crash of the tech bubble he wanted to avoid any kind of decrease in equity prices, therefore the government lowered rates and pumped trillions into the money supply. Naturally, the only place for this to go was into the housing market. The documentary made a great point about how the fed just pumps in money and it always ends up flowing somewhere. So pre 2008, the government added tons of cash, and because of the way that the housing market operated at the time, this is just where it happened to flow. The next thing that illustrated the governments tendency to cause problems when entering the market was the removal of the gold standard. Not only did this violate previous treaties, it was just so politicians could spend more money on questionable things. By no longer tied the value of the dollar to goal it allowed them to inflate and print as much as they wanted. The ultimate effect of this has been the inflation of the cost of living, and ultimately a drag on the quality of life of Americans. Overall it seems that when politicians upend the free market to spend more, it doesn’t end well.
Were never as smart as we think we are
The second reflection I had when watching this, is that most o the time we really dont have the level of intelligence or control that we think we do. This was must humorously illustrated in the situation surrounding the stock market crash and subsequent depression of 1929. There were literally people saying that we had, “Solved finance”. There was almost the notion that Americans had become so sophisticated that there was only upside and no risk. Even though there are often people that are able to predict coming downturns, overall my takeaway was that we always think were smarter than everyone else, when in reality we are just going along with the flow.*
Conclusion
Finally, I think its important to look around the modern economy and look at places that may have inflated bubbles inside of them. The government has used the fed to pump trillions of new dollars into circulation through near 0 rates in the pandemic, and has had to deal with those effects in the form of inflation. But is there another place we should be looking to see where the money has flowed. My first thought would be to examine the world of equity stocks. Although I am not extremely well versed on the topic, it seems as if the overall stock market is being pulled up by the so called magnificent 7. These tech stocks have such large market caps and their prices have moved so high, its making the whole market seem like its performing perfectly. I think it could be wise to look further into this situation so see if we have a potential bubble. If the fed is adding money, it has to go somewhere, and if there is money where it shouldn’t be, the good times cant last forever.