The housing and financial crises often precede or follow the collapse of empires. The dissolution of the Habsburg Empire and the British and the collapse of the Soviet Union were all marked by the eruption, then reduce the imbalances in the asset, the banking and financial markets.
The collapse of communism in Europe and Asia led to the emergence of a new middle class in these areas. With an operating profit increased and access to bank credit Flushed its members, a wave of unbridled consumption (particularly imported goods triggered), and with a mountain of increasing savings, they have traveled the globe for assets to invest their capital, from football to stocks and bonds.
The excess of savings, and led the unequal expansion of international trade to serious imbalances in capital flows and the distortion of price signals. This has encouraged speculation leveraged and arbitration, and try to diversify investment risks. The first led to extreme volatility and lack of transparency in this and the collapse of confidence among market players and agents.
The recent collapse in world stock markets – from Hong Kong to New York – generated another round of discussions semipternal central banks should abrupt adjustment in asset prices – such as stocks or real estate – as they do Examining changes in price indices for consumption? Are asset bubbles indeed inflationary and deflationary their break?
Central bankers meet it is difficult to tell a bubble until it bursts and that market intervention lead that is intended to prevent weapons. There is not enough historical data, reference, they move students who otherwise objectionable. This is disingenuous. Ponzi and pyramid schemes are an integral part of Western civilization since at least the middle of the Renaissance.
Assets grew in “asset stocks”. The houses built in the 19th century century still serve their purpose. The amount of new facilities over time is created, inevitably neglected in comparison to shares of the same class assets accumulated over decades and sometimes centuries. This is why asset prices are not anchored – they are only vaguely related to their production or even to their replacement value.
Bubbles are not the exclusive domain of stock exchanges and shares. “Real” assets include land and property, for construction machinery and other tangible assets. “Financial” assets include anything that stores value and can serve as a medium of exchange – from cash collateral. Even tulip bulbs will do.
In 1634, in what was later called “Tulipmania”, tulip bulbs were traded on a specific market in Amsterdam, the scene of a rabid speculative frenzy. Some tulip bulbs rare black has changed hands for the price of a large manor. For four years, it seemed, the fever, that enthusiasm would last forever. But the bubble burst in 1637. In a case of a less than the price of tulip bulbs has been reduced by 96%!
Is unique, Tulipmania was not an organized scam with an identifiable group of decision makers, which she directed and controlled. It has also been explicitly promised to investors regarding guaranteed future profits. The hysteria was evenly distributed and fed on itself. Subsequent investment fiddles were different, however.
Modern differs involve a large number of victims. Their size and ubiquitous sometimes threaten the national economy and the structure of society and cause serious political and social repercussions.
There are two types of bubbles.
Bubbles in the first category are executed or fanned by financial intermediaries such as banks or brokerage houses. They consist of “pumping” the price of an asset or asset class. These assets Stocks, currencies, securities and other financial instruments – or even savings accounts. To be a supernatural promise creates economies of artificially inflate the “price”, or “value” is a savings account.
More than one fifth of the population in Israel in 1983, participated in a banking scandal of Albanian proportions. It was a classic pyramid scheme. All banks, except one, promised to gullible investors, rising incomes banks hold shares traded.
These explicit and incredible promises were contained in the prospectus of the takeover of banks and won the implicit acquiescence and collaboration of successive Israeli governments. The banks will deposit their capital, retained earnings and funds illegally acquired by offshore subsidiaries shadow to try to keep their promises and unhealthy. Everyone knew what was happening and all concerned. It took 7 years. The prices of certain shares of 1-2 percent per day.
On October 6, 1983, broke the whole banking sector in Israel. Faced with mounting problems that threaten the government had to compensate shareholders. They offered to develop a program to repurchase shares for shares in 9 years. The cost of this plan was estimated at 6 billion dollars – almost 15 per cent of annual GDP of Israel. Indirect damage is unknown.
Greed and vulnerable investors are attracted to investment scams with the promise of incredibly high profits or interest. The organizers use the money to pay assigned by the new investors of the old order and establish a credible reputation. Charles Ponzi perpetrated many such schemes in 1919-1925 in Boston and later the real estate market in Florida in the United States. Thus, an effect “snowball”.
In Macedonia, a savings bank named TAT erupted in 1997, erasing the economy of an entire major city, Bitola. After much controversy and recriminations – many politicians seem to have benefited from the fraud have – the government faces elections in September, recently decided, despite the dictates of the IMF to offer meager compensation to affected investors . TAT was only one of the few similar cases. Similar scandals have occurred in Russia and Bulgaria in the 1990s.
Third of the impoverished population of Albania was cast into poverty by the collapse of a series of investment plans to leverage nationally in 1997. Inept policy and financial crisis management led Albania to the brink of disintegration and civil war. Rioters attacked police stations and army barracks and hundreds of thousands of weapons expropriated.
Islam prohibits its followers charging interest on borrowed money – like Judaism. To circumvent this onerous decree set up, entrepreneurs and religious figures in Egypt and Pakistan, “Islamic banks”. These institutions pay no interest on deposits nor demand interest from borrowers. Instead of this, applicants are partners in the banks – largely fictitious – profits. Customers will be charged for – no less fictitious losses -. Some Islamic banks have become accustomed, with Sky High “profit”. They have the path of other, less pious, pyramid schemes. They have melted and the economies and political institutions dragged with them.
By definition, pyramid schemes are doomed to failure. The number of new “investors” – and the new currency, they are available to the organizers of the pyramid – is limited. When funding ran out, and the old investors can no longer be paid, panic. In a classic “run on the bank”, everyone attempts to draw his money simultaneously. Even healthy banks – a distant relative of pyramid schemes – not so overwhelmed with panic. Some of the money is invested long term, or lent. Few financial institutions keep more than 10 percent of their deposits in cash reserves on call.
Various studies have shown that warned investors in pyramid schemes realize their dubious nature and stand by the collapse of other contemporary fraud. But they repeated the promise that they could withdraw their money at will ( “liquidity”) and in the meantime, given the attractive returns on it ( “capital gains”, “interest”, “Profit” ) wavered.
People know they are more likely to lose all or a portion of their money in time. But they convince themselves that they can outwit the organizers of the pyramid, that disbursements will offset the earnings or interest, before the inevitable collapse of more than sufficient for the loss of their money. Many believe they are successful, the extraction of their original investment at the time – mostly useless and superstitious – “warning signs”.
While the speculative rash lasts justify a variety of experts, analysts and researchers aim. The new economy is “free from” old rules and archaic modes of thought. “Productivity has increased and has become steeper, but sustainable, trend line. Information technology is as revolutionary as electricity. No, more than electricity. The stock valuations are reasonable. The Dow is about 33,000. People want to believe that these goals, “disinterested” analysis “experts”.
Investments by households are only one of the engines of this first kind of asset bubbles. A lot of money in pyramid schemes and stock exchange booms is laundered distribute the fruits of illicit pursuits. The laundering of tax evaded money or the proceeds of criminal activity took place mainly sell drugs through normal banking channels. The money changed hands a few times to obscure its trail and the identity of the true owner.
Many offshore banks manage shady investment rounds. They argue that two books. The government is ready “or” cooked “at the disposal of the authorities – the tax administration, banking supervision, deposit insurance, law enforcement and the Securities and Exchange Commission. Regarded as a true record in the second inaccessible, set of files.
This second set of accounts reflects reality: who deposited how much, when and under what conditions – and who borrowed what, when and under what conditions. These arrangements are so stealthy and convoluted that sometimes even the shareholders of the bank lose track of their activities and ignore reality. Unscrupulous management and staff sometimes exploited the situation. Embezzlement, abuse of authority, mysterious trades, misuse of funds are more widespread than acknowledged.
The thunderous collapse of the Bank of Credit and Commerce International (BCCI) in London in 1991 showed that for most of the decade, managers and employees of this institution were stealing the darkness and the diversion of 10 billion U.S. dollars. Department of Supervision of the Bank of England failed to spot the rot now. The applicants – were partially offset – by the principal shareholder of the bank, an Arab sheikh. History repeated itself with Nick Leeson and provided devastating illicit trade, and the venerable old Barings Bank in 1995.
The combination of black money, poor financial controls, shady bank accounts and shredded documents, making an accurate representation of cash flows and damages in such cases is still possible. It is impossible to say what were the contributions of drug barons, American off-shore companies, or European and Japanese tax refractories – channeled precisely through such institutions – the Wall Street boom of recent years.
But there is another – perhaps the most pernicious – type of speculative bubble. If financial institutions to lend to the unworthy, but the good political relations with friends, family and members of influential politicians – they often end up fostering a bubble. South Korean chaebols, Japanese keiretsu, as well as US-based U.S. companies have frequently used these cheap funds to their shares or to invest in real estate, driving prices artificially high in both markets.
In addition, despite decades of bitter experiences – from Mexico in 1982 for Asia in 1997 and Russia in 1998 – financial institutions continue to examine ways. They act like stocks in conformity with “lending trends”. The portion of assets with the highest returns in the shortest possible time Garner. In this regard, they are not very different from investors in the schemes of investment pyramid.