Bubbles and Panics
Bubbles and Panics
An economic bubble refers to an overflow in the market that is as a result of a speculation in the market offering a particular asset that causes a burst, or an expected expansion of activities in that field make resulting in very high levels of inflation on the prices of commodities. In the due process, the costs become unmanageable, and the bubble followed by a crash in the associated market field. In the period of the late 1990s, investors were filled with high expectations of becoming very rich by using the internet as a platform for investment, they plunged their money on the believed golden opportunity and later on hoped to become world tycoons because of the of the enormous profits after (Allen & Gale, 1999). This led to many companies running to do their business on the speculated dot-com platform. Dot-com companies, as a result of the many companies rushing up to pump their money on the internet boom many of the investors forgetting on the traditional investment metrics like the number of firms on the real share price related to its per-share earnings. Surprisingly they ventured to a style of business the way for building a brand awareness and economic share fast even if it needed giving out their valuable services at a lower price or even for free. However due to the extensive growing of and advancement in technology and an increase in some people able to access the internet and easily get online. Significant investments made by the startup firms that went public led to the bankruptcy of some of the companies and the loss of the enormous amount of money which went waste in the market and loss of value of the currency. On the other hand, the housing bubble is a recent crisis on the financial market that is as a result of the on the increased demand for shelter facilities in the face of the unlimited supply that in turn lead to a rise in prices in the market segment (White, 2011). Therefore, investors ran in the speculated money making field of market and flooded that particular sector of the real estate business resulting in an increased amount of supply that drove out the quantity of demand. At some instance, the need became stagnant and decreased while the supply was increasing, and this resulted in a sharp decline in the prices and thus causing a bubble explosion. Therefore, if the government does not act on the crisis in the financial market, inflation will become a major problem in the economy. The essay thus discusses on how the government is supposed to act to prevent the occurrence of bubbles in the economy. Therefore, the government is required to rely mostly on implementing monetary policy with the help of the central banks that would be the guide for the interests rates offered in the economy. Nevertheless, there would be need of having a control of advertisements, having advisory bodies that counsel companies before investments and many more.
There are several ways on which the government can use to prevent bubbles from taking place, firstly is by the understanding the role of a nation’s central bank in controlling or preventing the occurrence of bubbles in the market. In the past years, price bubbles have taken place in the real estate business in many of the developed countries like the U.S., United Kingdom, and Japan. As a result of this crisis in the financial market especially in the real estate sector and the importance of the housing business, price bubbles can indeed damage the economy of a given nation and lead to price crashes. Therefore, one agency that will play a significant factor in the prevention of the crisis is the importance of the role of the central bank in the regulation of the supply of money and the short-term interest rates (Allen & Gale, 1999). Reasonably the cash in supply and the interest rates are the main factors that play a role in the occurrence of the housing bubbles, hence bubble associated with the real estate business primarily occur when the rate of interests are arguably low, and credit is cheap. Therefore by creating a tightened monetary policy and raising the rates of interests the government through the help of the central bank can inhibit a turmoil from taking place especially the housing bubble. Moreover, the contradictory monetary policy would be effective in controlling the housing bubbles by actually slowing the rate of development of money supply or the cash in an amount to reduce or inhibiting inflation from taking place. However, this type of monetary policy could be a cause of the reduction of the economic growth in action and subsequently result in an increase in unemployment. Therefore, policymakers need to be careful while implementing the policy. Additionally the nation’s central bank serves as the authorized agency whose role is to monitor economic growth in their respective countries they should and always keep track on the asset prices in their various sectors of the markets and. Thus the case of a particular problem they should drastically alert the responsible authorities in the affected areas thus inhibiting the presence of a crisis. Despite the central bank’s role in the articulating its positions, it is faced with various problems that others include political issues but that discussion will be in another context
Another issue of concern was the presence of many uncontrolled and misleading advertisements across the nation that frequently advertised the then-booming real estate business. Most of the-the televisions filled with ads that never shared information about dangers involved in people partaking in the actual estate business (Follain & Giertz, 2013). They only gave information regarding the benefits of the enterprise, for example, the “flip this house” show that aired on the A&E television mislead consumers by offering false statements on the terms and conditions of their contracts that in turn made many buyers run into signing contracts without having the appropriate information. Furthermore, during the whole process of the housing business there was no real relationship between the seller and buyers as the sellers did not care with the problems that consumers would face after purchasing their homes. The homeowners gave much trust to the agents whom they thought had enough information but instead they did not disclose the complete information to their buyers an act that against the-the nation’s Constitution particularly the estate agents act. The government should, therefore, ensure that full implementation of the law without hesitation that would, therefore, find any officer guilty of an offense since giving a misleading information to buyers is unlawful. The government should ensure that real estate agents fully adhere to the law that stops them from breaking professional negligence. Standards control the behavior of professionals to and for the purpose of establishing real action to the unprofessional agents it would be necessary to investigate the possible causes of action.
Also, the government should be vigilant on the kinds of businesses taking place in their countries and act on as a body that regulates businesses taking place instead of just sitting around and watch investors flooding a certain segment of the economy and do nothing as they did while people were flocking the real estate (Follain & Giertz, 2013). The government should limit the number of investors pumping in their money in the real estate industry, and they can do this by also proving healthy environments to other types of trades thus luring investors to another type of business markets other than the real estate kind of an industry. This would prevent people from losing their money because the high investment taking place in one sector of the market rather than a balance on the level of investments in each of the country’s market share would otherwise prevent the occurrence of bubbles in the financial market (White, 2011). Furthermore, there is a need for the government to come up with an expert’s analysis committee that would come up with programs that would be efficiently potential advice people who plan to invest their money in housing industry on the possible risks and benefits to reduce the lack necessary information as investors venture into the market.
Another way in which the government can play its role in ensuring that bubbles and panics in the financial business world do not occur is ensuring that there is a governing body that regulates the amount of advertisements being aired out in the different media outlets across the (Follain & Giertz, 2013). As a result of having an independent level of publication where only the housing business activity promotion will lead to many investors and-and buyers running to that sector, and there would be no bubbles experienced. AS seen from the program known as the “flip this house” aired on the A&E television network that substantially advertised the real estate market resulted in also other local station in copying their programming style and started airing shows that promoted the housing establishments hence creating a full advertisement of this sector of the industry (Cao & Ou-Yang, 2005). As a result, many people ran into buying houses without the need of concern of how the acquisition of the houses takes place. If the government were not able to control the level of information being shared by the public, not many people would rush on the available opportunity to buy houses or investors pumping their lots of income into this sector of the economy hence there would be no housing bubbles experienced in the nation. It is important that the level of service or product promotion taking place in a country should be of a controlled level that bring benefits to society rather problems in the financial market.
Moreover, the prevention of bubble formation can be done being able to detect the Bubbles early enough. The government should ensure that they develop, maintain and keep updating a statistical or econometric model that will be able to capture the relationship created between the prices of the house and the other variables in the market (Basco, 2014). The link between this factors can give detailed predictions of any future house prices that can then be used as a signal to the probability of implausibly high price levels in the market. Even though the econometric system may not be very efficient in the house price bubbles occurrence, its do provides relevant information regarding the house price that can help guide the policy.
Application of countercyclical capital policies by the government is an important tool that the government can use in the prevention of the bubble formation (Romer, 2013). The capital requirements for the financial institutions basing should be done in response to the conditions of the local market. As such, when the prices of a certain asset or sector of the economy are high or increasing at a very high rate than the positive market fundamentals banks regulators are required to increase the capital ratio for that asset. Regarding housing the, the capital ratios are to apply to the residential mortgages. Countercyclical capital requirements have two benefits. First they enable the financial institution to withstand severe shocks. Secondly they are lowering the likelihood of an extreme event. Therefore, if this policy is used before a burst cycle, it will help both the housing and lending demand sector.
The government can prevent the possibility of a dot – com bubble from forming by requesting the economics administration to think about the possibility of the next boom and bust cycle. As a result of their thinking, they will be able to predict the future occurrence of the cycle which seems to shorten over the years (Cao & Ou-Yang, 2005). Approximately the next burst might come by after a five to six years. With this information, the government will be able to have preparations ready so as to prevent another dot-com explosion from hitting the country. To ensure appropriate prediction will take place the government needs to employ economists with a proper understanding of the possible factors that bring about the bubbles so that the government can chip in and prevent the occurrence before it strikes.
The government can, on the other hand, avoid dot-com bubbles by imposing a commodity standard for example on the fed. A commodity standard brings about a discipline on the central bank as it forces it to acquire reserves for the product to bring about an increase in the money supply (Jurkonytė et.al. 2009). Therefore, as of today the government can bring forth the inflated in the asset bubble without paying the cost since the currency and the commodity are not linked together. With the commodity standard in place, the government will be able to detect the incoming of a bubble in the market. This is because these price of a product will be traded on the spot and in the future markets. However, excessive easing brought about by the Fed would be responded to by raising the prices for the commodity. In the recent years, some of the Fed officials did say that they were not able to recognize a bubble asset development. However, with the control of the commodity standards it would be easier for the Fed officials and other people to know the next bubble in the market. As such government should take this issues as a problem of great concern and look into it by ensuring that the standards of the commodities are controlled.
The government can prevent the formation of a bubble by regulating the acts of the consumers. For example, the government can ensure that before a person is made legible for a loan so as to buy a car, a home or anything over a certain amount of dollar value, that person must be passed through a basic training (Jurkonytė et.al. 2009). The training could be something like six weeks offering the introductory course on finance and loan. Regarding the person outcome from the training, the government could then access whether he or she is liable to receive the loan, where if he or she passes the loan is made available to him or her. This act though it might bring complications in the free market it will be a reasonable solution to the prevention of the reoccurrence of another bubble.
Also, the government can prevent another dot-com bubble from happening by monitoring the rate of growth in credit and financial leverage (Edison et.al. 2000). Credit to GDP ratio is an important indicator of the probability of the occurrence of a boom and force condition in the market. Data on the borrowers and analysis of their balance sheet is another sign of forces in the market. Such details as the capital accounts are also very vital to the provision of information regarding the temporary leverage positions that serve as a warning to the existence of a boom in the market. The government should ensure that the central banks develop a range of measures to prevent the bubble from forming. As such there is a need to come up with an international monitoring system by the banks and other financial institutions (Edison et.al. 2000).
Lastly, the understanding of the correlation between a company and the stock market could be used as another strategy to prevent the occurrence of another dot-com bubble. For the government to evaluate the relationship, it is important for the government to understand the beta coefficient (Basco, 2014). The beta value is significant in the stating to which the rate of the stock changes with the economy. As such a beta value of about 0.5 would indicate that the market increase with half much increase in the share. Since most of the internet companies have a higher beta coefficient, it would be important for the government to understand the potential volatility and the economic trends before allowing people to invest in the business.
In conclusion, bubbles have a significant effect on the economy of the country and the world as a whole. With bubble, the economic growth is relatively hindered. The government is capable of preventing the occurrence of a bubble in the economy. Therefore, the government needs to be very keen and predict any future occurrence of a bubble in the market. It is the government responsibility to provide measures to protect the investors and the consumers from suffering a bubble in the market. To ensure the bubble formation does not take place the government need to put forth rules and regulations all on the market that are to be embraced as a strategy to prevent bubble formation. The government is also given the mandate not only to protect the citizens from the bubbles but also take them through what need to be done. Through the improvement in technology, the government needs to develop tools to predict the possibility of the occurrence of a bubble. Moreover, the government can offer free education to its cities and citizens on the causes and the effects of bubbles in the economy.
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