Wednesday, July 11, 2012

Will on-tap liquidity eventually burst the bubble of fear? (bs)

In a recent post on FT Alphaville Izabella Kaminska is positive about this. She goes on explaining how the investor’s run on safe assets results in negative rates which “destroy the vital process by which economies form capital, grow and generate employment”. Skeptical on the power of monetary policy to circumvent such a bad (temporary but potentially persistent) equilibrium, Keynes envisaged fiscal policy to intervene.

"It was the government’s superior capacity to bear risk — not any inherent belief in its capacity to make better decisions — that led Keynes to advocate greater state-led investment when the economy becomes gripped by a bubble of fear."

And something else is worth noticing: financial repression, prominently criticized by the newly appointed Harvard Professor Carmen Reinhart,

“is no accident. It is the deliberate objective of a policy designed to curb the demand for liquid assets and force greater willingness to commit to less liquid forms of investment.”

So far so good!

Yet one statement struck me as pretty innovative.  Because the system is (allegedly) completely overwhelmed with capacity, we need to deploy capital by shifting demand to non-material assets like human interaction, health care, education etc. Only then, the author posits, will capital become scarce again and thus positive yields on investment will be revived.

 Of course if that is the case, the fear bubble won’t so much burst, as eat itself out.