I sent an e-mail to Mike Shedlock on April 10 asking him to take a look at my Google Knol entitled The Bull Market Caused the Economic Crisis. Mike is a registered investment advisor representative for SitkaPacific Capital Management. He writes the Mish’s Global Economic Trend Analysis blog.
Mike responded on April 11, saying: “Loose money is at the root of every bubble. The bull market was caused by loose money.”
Set forth below is the text of the e-mail that I sent to Mike on April 12. I will report on Mike’s response in tomorrow’s blog entry.
Thanks for taking a look and for letting me know your thoughts.
I don’t want to be argumentative. But you are the third person who I respect who said something along those lines to me in the past three days and so I wanted to let you know my reaction. I fully understand the logic behind your comment. But my thought is that perhaps people are coming at the “loose money” angle from the wrong direction. By “loose money” I presume that you mean that the Fed handled monetary policy improperly. Could it be that the most basic problem is more simple than that?
Stockholders are able to vote themselves raises whenever they please just by bidding stock prices up. We bid stock prices up to three times fair value in January 2000. That translates into $12 trillion of overvaluation. Is that a loose money problem all its own, a much bigger one than the one that results from anything the Fed does? As a society we incurred $12 trillion in debt that had to be repaid by future investors (the investors of today!) regardless of anything the Fed did.
It’s important to identify the true cause of the problem because different causes point to different solutions. If the Fed is the problem, we need to reform the Fed. If the human inclination to bid up stock prices is the problem, we need to teach people new ways of thinking about how stock investing works. For example, we could provide people tools showing them that stocks offer a poor long-term value proposition when selling at high prices and encouraging them to sell once stocks reach such price levels. We wouldn’t need to reform the Fed to do that. We wouldn’t need to take any political action at all. We would just need to change the messages about stock investing that people hear.