Hi MeDroogies,
A few generalizations that requires qualification at the micro level?
'Well, I would not agree that the recent bubble was based on the extension of credit.'
A few months ago I went to my bank to get a line of credit for 'emergency use'. I asked for 30K. Everything was fine except that the representative INSISTED that based on my financial position I should take 120K !!!.
Now while that was very flattering I guess it was her rationale that flabbergasted me.
1- 'You can INVEST it in mutual funds or stocks.' and deduct the interest, that's what I do (DOH!)
2- You are in much better financial shape than the majority of people that I see come in for a credit line. (SCARY)
Also each RRSP season in Canada, (the time leading up to making qualifying tax deductible contributions to retirement plans for the current tax year) people who have waited to the last minute as is their wont, borrow to make their contributions. These 'contributions' are invariably placed in some banks's 'Mutual Fund' de jour. Combine that with the fact that a few years back Canada changed the tax legislation to allow for 'catch up' on unused contributions (ergo deductions). After a few years some people suddenly had 30, 40, 50K of contribution room available with the accompanying deduction. The financial planners and banks were promoting borrow to make that contribution... borrow at prime !!! Very enticing to take on a little debt, get a huge tax refund, and double your money in the market to boot. So imagine all the lucky souls who borrowed 40K at prime and put it into a Tech fund in time for the 1999 taxation year :0)
'Still, Kudlow isn't wrong. Speculation is necessary for the liquidity of markets and fluidity of transfers. Therefore, there is technically no such thing as a speculative bubble.'
If a thousand people buy a 'to the moon penny' and are left holding the bag. Well, too bad, and that's not a bubble, just a few stupid greedy suckers. However, when 'investing' in stocks with ridiculous valuations becomes so commonplace that creating bagholders out of the 'investors' affects the general economy... sir you have a speculative bubble.
regards
Kastel
PS: The BOTTOM is in when the SI spell checker recognizes bagholder as a word LOL. |
