The Boom in Cynicism

Stocks are rising fast – it’s clear there’s no cure for stupidity. But when the bubble bursts next time, let the speculators go broke.

The markets are going crazy. On Monday, the Dow-Jones in New York rose more than 200 points to its highest level in 13 months. Gold is more expensive than at any other time in history; the dollar continues to weaken and is almost at the level it was when the great financial crisis began last year. Dealers for banks and hedge funds are buying stocks and commodities as if they think a boom is imminent. They’re buying gold as if they feel they have to protect themselves from inflation and they’re selling dollars as though they expect interest rates in America to stay at zero forever.

None of this has anything to do with reality. American unemployment is rising faster than had been feared, meaning the next recovery will be far weaker than normal. Factories stand empty and payrolls are falling – both strong indicators for coming inflation. And of course it’s also clear that the dollar can’t keep sinking forever and that interest rates in the United States will have to rise again.

A New Speculative Bubble

One year after the collapse of Lehmann Brothers, a new speculative bubble has again formed in financial markets. The bubble was made possible by the governments and central banks of the United States and Europe who fought the financial and economic crises by pumping billions of dollars and euros into the global economy.

The therapy worked and the world has taken a step back from the abyss, but the situation is far from normal despite all that. The excess money will someday have to be pumped back out of the economy. Everybody taking part in the current orgy realizes that, but they continue speculating as if they didn’t. In New York, people talk about a skeptic’s boom; speculators want to keep gambling and winning before the music stops and it’s too late. They might as well call it a cynic’s boom.

In the wake of the crisis, the world has learned a lot about the activities of financial markets. Part of that knowledge is the fact that it’s profitable for dealers to speculate on rising prices even if they know the prices are already inflated.

They only have to gamble that other dealers don’t know that. And even if it gets to be too late for them to bail out at the right time, that’s unimportant. If one individual dealer loses the same amount as all the others, he comes off better to his boss and the stockholders than if he had missed a chance for big profits in the short-term. The lingering effect after the last crash on the investment banks is that they have to think even shorter-term than they do now. When the next bubble bursts, those who got in at the last minute will lose the most, but the effects will be limited. What’s of paramount importance is that the feeling of euphoria in the markets isn’t dragged down as well.

The banking crisis has by no means been resolved. In Germany, the Bavarian State Bank has reported new losses amounting to billions of euros; in the United States, officials closed five banks on Friday to keep them from total collapse, an action hardly noticed by the public. Governments decided to take the right steps at all three financial summits held thus far, but most of the measures have yet to be put in place.

The question of when and how fast the reserve banks can normalize the money supply remains unanswered, for fear of prompting new aftershocks. Historically, the present situation is without precedent. U.S. Fed Chief Ben Bernanke, European Central Bank President Jean-Claude Trichet, and their counterparts are operating in completely uncharted terrain.

The latest eruptions in the market do show one thing clearly, however: there’s no cure for stupidity, at least not in the financial markets. We should make sure that nobody besides the idiots themselves get hurt when the next bubble bursts.