Bubbles by Chris Martenson - Essay Example

Bubbles by Chris Martenson Affiliation In this video, the explains what a bubble is, what causes a bubble toburst and the effects of bubbles bursting. After watching the video, several things have been learnt. A bubble is simply a situation created when prices of assets are based on views and opinions of market players. As a result, the asset price inflation increases to a level where incomes cannot sustain. From the video, I have learnt that bubbles are caused by human greed where people make investments based on hope and not reason and not based on reason.
The video has also highlighted three major characteristics of bubbles that make them very dangerous to any economy. First, bubbles have the ability to self-sustain on the way up. This means that as the prices increase, it becomes a justification for charging higher prices on assets. Therefore, when a bubble exists in an economy, it becomes difficult to control. Secondly, since bubbles are merely based on hope and greed, they are like illusions. When this illusion is finally lifted, the asset prices drop significantly, and the hope is crashed. Finally, the author has shown that bubbles tend to be symmetrical in time and price: the time it will take for the bubble to create is almost equal to the time it will take for the bubble to unwind. The longer a bubble takes to form, the longer the effects will last in the economy.
The 2007 housing bubble is a recent example of a bubble that has affected the American economy and the rest of the world. The author has shown that although the bubble started way back in 1998, it was still never stopped. As the author narrates, bubbles have their way around with the people. In other words, people always tend to get tricked into believing that things will be different. Based on the video, it is obvious that bubbles can be avoided if people stopped being guided by the false illusion that “this time, things will be different.” In addition, in the United States, the Federal Reserve failed in its duty to protect the public against the housing bubble. Even when the signs of the bubble started to show, the Federal Reserve continued to lower interest rates. It was rather using researches to convince the public that the housing was not going to create an asset bubble. From this, the video points to the importance of having an effective central bank system in preventing such economic catastrophes. In the United States, the Federal Reserve failed to act on the problem before it became too big.
Finally, the video shows that an asset bubble is just an indicator of a bigger problem. The housing bubble was just an indicator of increased borrowing. There was an increase in debt from $27 trillion in 2000 to $48 trillion in 2007. This shows how asset bubbles affect other sectors of the economy. In addition, bubbles are destructive because people/organizations tend to make the wrong investments. During the 2007 housing bubble, too many houses, malls etc were put up. Unfortunately, these investments were done without a proper projection into the future. From this video, it can be concluded that asset bubbles can be detected and stopped if the right analyses are done. This requires reliance on the voice of prudence and reason and not hope and greed.
Reference
Martenson, C. (2009). Bubbles. Retrieved from https://www.youtube.com/watch?v=0F7SCbrU5sQ Read More