A Global History of Financial Bubbles

Richard Kramer:

Welcome back to Bubble Trouble, conversations between two bots parading as humans. Oh no, that's me, the independent analyst, Richard Kramer and the economist and author Will Page, that's the other guy. And this is what we do. Lay out the inconvenient truths about how business and financial markets really work. This week we get back to our very favorite topic, the trouble with bubbles. Will and I are both keen students of history and economics. Well, maybe Will's keen on economics, but it's not getting him a lot of spicy dates. And we're going to delve into a fantastically accessible book that compliments this podcast like gin and tonic. We're going to be in conversation with the authors of Boom And Bust, A Global History of Financial Bubbles. Will sends me the books and I actually read them. Boom And Bust was an engaging tour of the last 300 years of bubbles with a few really simple principles that we're going to get into and one of which I thought was just especially brilliant for my own thinking. So we've got 40 minutes to capture the essence of that rollercoaster ride. So let's blow some stuff up.

Will Page:

William and John, just welcome to the podcast, thrilled to have you on. Thrilled to champion this wonderful book. But first things we'd like to do with our guests is give you guys the microphone to introduce yourselves just briefly in our tweet link statement. But very important, tell our audience how they can follow your work.

William Quinn:

So I'm a senior lecturer in finance at Queens University, Belfast. You can follow me on Twitter @wquinn05. I research into historical financial bubbles. I did my PhD on the British bicycle mania, one of the less known financial bubbles in history. And I also work on historical financial markets, mono market manipulation and so on.

John Turner:

So after Will has given you his blue tick length introduction, my name is John Turner. It's great to be on your podcast. I'm a financial historian and I work at the Queens University of Belfast, and you can find me on Twitter @ProfJohnTurner.

Will Page:

Grand stuff. Now, John, you talked about what you studied at university. When I was at university, I studied the Argentinian default, which most professors say, "Which one?" Because every 15 years they seem to go bankrupt. Promise IMF, it would never happen again and they'd go bankrupt again, another 15 years. This always reminded me of the story, the children's book, the boy who cried wolf. Cried wolf, the wolf isn't there. You cried wolf again. The wolf isn't there. The wolf finally comes. Does that children's book resonate with your very adult book? Was it in any way an inspiration? What made you write it?

William Quinn:

An inspiration that made us write it? Well, it's more something that came up, that we discovered somewhat unexpectedly about financial bubbles, which is that people tend to call financial bubbles all the time. This is forgotten that there are so many bad, pessimistic predictions saying, oh, we are in a bubble when we're not in a bubble that people forget about. You don't look quite so stupid when you say there's going to be a crash, and then the crash never arrives. And we really found this during the .com bubble. If you go back into the early nineties and the mid-nineties, people were saying, what is with the internet and the internet stock, this is all a massive bubble. But at that time it was actually a great time to invest. And what happens then exactly like the boy who cried wolf, is that when you get to 2000 and stocks really are overvalued and there really is a bubble. No one's listening to those people anymore. So...

Will Page:

Yeah, it's interesting. Now, Richard has got a ton of questions for you on this, but I wanted to lean into a bigger topic that's been bugging me for a while now. We recently had Chris Leonard on our podcast, and the podcast is called The Wealth Addicted to Easy Money, author of some fantastic books. And it got me interested in this difference between when we talk about the economy, is it the financial economy or is it the real economy? So just a few icebreakers here. If I go back to university and I learned about central bank inflation targeting and independence, in theory, I got it, make the Central Bank independent. I think Gordon Brown did that within eight days of becoming Chancellor of the Exchequer, which is an incredible achievement and they target inflation and that's the end of boom and bust. And that's still taught in universities today. But since the mass adoption of central bank independence and inflation targeting, what does it actually solve? Given you've published this fantastic book saying you haven't got the end of boom and bust, you've got a book called Boom And Bust.

John Turner:

So I'm so nerdy that I can remember where I was when Gordon Brown made that announcement I was sitting at-

Will Page:

Oh my goodness.

John Turner:

I was sitting in a hotel.

Will Page:

It's true JFK assassination question. There you go.

John Turner:

Yeah, yeah, yeah. I was sitting in a hotel and Nottingham about to have a job interview when Gordon Brown came on with this announcement that he was going to make or give the Bank of England operational independence. So we're financial historians and there's a central problem with central banks and with governments when they have no issues, that is, they like to over issue those notes. Within the Central Bank, the Bank of England in this case was designed. It was designed so that there wouldn't be an over issuance of notes. So they connected the money issue to gold. And that's essentially the system that we had right up until the 1930s. And then we get Bretton Woods kicking in and Bretton Woods ties sterling to the US dollar, and the US dollar is tied to gold. Then that disappears in the early 1970s and all of a sudden the UK has a problem.

How is it going to control its money supply? How's it going to stop the government, the Central Bank over issuing money? And so they experiment it with monetarism, they experiment it with tying, pegging the currency to the deutschemark. They experimented with the ERM, the exchange rate mechanism. And none of those things seemed to do it. And it's then that we get the birth of inflation targeting and Central Bank independence. And that in one very narrow way dull is successful because we get low inflation. And that's the problem that the UK had been wrestling. But that's in a very narrow sense.

One could argue that we would've got low inflation anyway given the great moderation that was just around the corner. But I think if I was going to be critical of Central Bank independence, I think we'd have to be critical about it in its design. Because one of the things Gordon Brown did when he announced operational independence for the Central Bank was he also said, oh, financial regulations going to be conducted by another body, not the Central Bank. So we're taking regulation away from the institution that's been doing it for over 100 years and we're going to give it to another institution so that we've got pure independence of [inaudible 00:06:29. That was an unmitigated disaster.

Will Page:

So that's independence and impotence. Is that the right way to express?

John Turner:

Completely. And also the thing was in terms of inflation targeting, so you're targeting like something like CPI, so that's all well and good. But I can remember in the early 2000s, people were beginning to talk about, well, should we be also targeting house prices? 'Cause house prices are accelerated. And so the monetary authorities then they're consumed with targeting this really low, which at the time it was an early 2000 really low CPI. But what about runaway inflation in housing markets? So huge problems with it there.

Will Page:

I call it the water bed effect. If you pressed out on inflation here, you just send it elsewhere. And the property market, as we know, went on a rally whilst inflation stays stable. So let's just stick with that. And I know Richard's championing a bit to get on the book, but just sticking with how students listening to the show are taught economics today, back to that Central Bank independence rationale. The idea was you solve the political cycle every time it's an election, the government reduces taxes and increases spending to get reelected. That's how it's still taught. I'm a fellow at the SLSC, I checked lecture notes, but isn't that missing the point? We have political cycles we can solve for, but then we have these financial cycles that we're not solving for. What's your thoughts on that?

John Turner:

Yeah, so again, it goes back to that fact that, okay, so we basically disciplined government so that they're not ramping up or pushing down interest rates in the two years before elections and then ramping them up straight after elections, this political business cycle. So we've taken that part out of the hands of governments, but there's still something else that's going on with this and that's to do with the housing market. Because house owners tend to vote more than non house owners. House owners are really interested in what's happening in elections. And so I think keeping really low interest rates, making sure interest rates are low, that benefits people trying to buy houses, it benefits people trying to get onto the property market. And so I think there is still that political element here within the new design that we've got.

Will Page:

I want to digress here, but the Labor Party is currently proposing to go and hammer second homeowners. I wonder whether they backtrack from that policy to your point, because these second homeowners are voters and influential voters at that. Last thing is, I do remember if I... For all the hungover stone smashed lectures I've sat through at Glasgow and Edinburgh, something called Goodhart's Law, which roughly speaking says if you target one variable in your policy framework, all the other variables move in different directions and cancel it out. So if you tackle inflation, like you say, maybe the exchange rate goes wild or employment goes wild, but that's nothing to do with me. My job is to blinker myself to just looking at inflation targeting. Anything you can bring to light on Goodhart's Law with regards to this fantastic book that you've written?

John Turner:

So yeah, Goodhart's Law was really a critique of monetarism. So this was in essence, so Milton Friedman, sort of the godfather of monetarism identifying these statistical links between inflation and the growth of monetary aggregates such as M3. And so then the idea was, okay, we target the growth of M3. And Goodhart's Law basic says, well, as soon as you start targeting these measures, the statistical relationship breaks down. And so Goodhart's Law was basically saying, okay, that's why Monetarism ultimately failed. I don't know that it necessarily tells us much about boom bust cycles, but it certainly tells us why monetarism wasn't a success.

Will Page:

I push back on that just a little, but I think it just, if your job is hit that inflation target and nothing else matters, well, clearly lots of other things matter. And the more that you ignore them, they matter even more. And that's where I kind of see a evolution of Goodhart's Law explaining boom bust cycles.

John Turner:

Potentially. But I suppose the Goodhart's Law is really about it when you observe a statistical relationship that it breaks down as soon as you start targeting that statistical relationship. And when the Bank of England's trying to hit the 2% target for inflation, it's not looking at statistical relationships, it's looking at a whole bunch of variables and trying to guide the economy onto that path. Not very successfully admittedly, but that's what it's trying to do.

Will Page:

Agreed, agreed. And before handing over to Richard, I have to say to our audience, YouTube now has some fantastic lectures from Milton Friedman live up on there. And if I use the Irish expression when I lived in Ireland for a year of gobshite, he is one persuasive gobshite. Richard.

Richard Kramer:

So not having to translate gobshite to our North American readers, or listeners. So one of the things I really enjoyed about Boom And Bust was you had this very simple three-sided triangle in the book, which kind of features in all the bubbles you cover. And it includes money and credit, which we all understand because we've just come off a decade of zero interest rate policy. You have speculation, which I feel like we all do as opportunistic animals that we are. But the third one I really loved was marketability. And I have to wonder, is the snake oil salesman just trumping the central banker or the boiler room stockbroker here? And can you just talk about capturing the attention of the masses with the promise of easy riches? Is that just what really matters? And have we moved the words gullibility and naivete in the dictionary and just filed them under human nature?

William Quinn:

Well, maybe it's fair to say that bubbles are usually a minority activity. In fairness, there are a lot of people who don't get involved in every cycle, but there are always some people who do. And when we talk about marketability, we are really talking about an asset that's very easy to sell, and that can mean easy to advertise, easy to get to your consumers, easy for them to a access, also easy for them to buy. So something very liquid, something that's you can trade multiple times a day ideally. And the reason that this keeps coming up in the book is because that's what really changes over the past 300 years. The reason we don't seem to see any or many financial bubbles prior to 1720, which is why we start the book in 1720, is that financial assets aren't very marketable. You have a debt contract, the government owes you some bonds, so you own some bonds and the government owes you some money, so you get some money every year.

But those bonds aren't very treatable, so you don't really get a bubble in them. You need to be able to buy and sell frequently for there to be a bubble, because if you can't buy and sell frequently, then there's not the opportunity to speculate in the asset. And as we keep going, working our way through bubbles in history, we see technological innovation, things like the joint stock company. So you have very tradable equity replacing these liquid debt contracts. And then more recently you get things like the internet, you get obvious trading and so on. And suddenly buying and selling things becomes much more easy and maybe more addictive as well. And that's why it keeps coming up. It's something that actually changes. People talk about bubbles. They sometimes say human nature doesn't change, which I would mostly agree with, but this is something that has changed. Marketability is, it increases year-on-year.

Richard Kramer:

I want to push back on one thing you said there and bring in one of Will's all time heroes that great Scottish rogue, John Law, because it wasn't a minority impact in France to have this Mississippi bubble. It basically bankrupted the country and that you have had plenty of instances where yes, okay, there were a relatively small number of folks who were trading in tulip futures in the Netherlands in the 17th century, but in that case, it was something that somehow captured the popular imagination. And I dare say in some of the US stock market bubbles that we've seen, certainly we haven't seen them as affecting a minority of the population. The repercussions were much wider. Is that marketability something that's really only a narrow cast or does it get broad cast?

William Quinn:

So the consequences aren't necessarily narrow. You do get the Mississippi bubble, who was buying Mississippi shares. What we know from the prices of Mississippi shares that most French people couldn't afford them. So it's not that everyone is going to the market. All of these farmers in France are getting swept up in this because they couldn't afford to. What did happen with the Mississippi bubble is that John law took over the entire French economy.

Richard Kramer:

A perfidious Scotsman. A perfidious Scotsman for sure.

William Quinn:

He started printing paper money for the first time and then inflating that money supply is a way of blowing up the bubble even more. And then you have inflation and people are trying to get the money into gold and diamonds, and then he bans the cording of gold and diamonds. And then-

Richard Kramer:

[inaudible 00:15:12].

William Quinn:

[inaudible 00:15:12] loss of confidence, and it's everything he does to try to maintain the bubble that sucks in everyone else. We've got to be clear here, the alcoholic gambler who was on the run from the police is a gray alumni for Scottish University students to look up to. I don't see the problem.

Richard Kramer:

That's Will's entire university career summed up right there. So I'm going to move on to another point, which you cited in the book. How many instances where short sellers or people who bet against bubbles were called morally dubious, and it's okay to bet on red, but you're not allowed to bet on black and it's okay to bet on your team winning, but it's really not good form to bet on the other guys losing. Someone has to profit from collecting the trash. And why do you find this demonization of those who predict bust not boom?

John Turner:

Yeah, that's actually a really interesting question. And partly short sellers as speculator, particularly in the 19th century and into the early 20th century, people can easily identify them as speculators. It's really hard to identify speculators on the other side. And in the 19th and 20th century, early 20th century, there's real social hostility to speculation, not just short selling. So to speculation in all its guise is it's basically viewed as a form of gambling. And we see this particularly in commodity markets. So commodity markets, you've got a farmer producing wheat, you've got a miller buying the wheat on the other side. You see the entrance of speculators into these commodity markets. And so a lot of commodity markets in the United States, in Europe started to ban short selling, started to ban futures trading because farmers were really angry at what they saw as these evil speculators who were distorting the trade in wheat.

And so you get that sort of pushback then against this, but so speculation, today's is more socially acceptable, but we still have this deep-seated hostility against bears, against these short sellers. And so the question is why is that? Could it be that there's powerful interest who basically demonize short sellers because short sellers play a useful function largely in financial markets? And so is there a pushback from powerful interest, pushback from politicians? And so I can remember the headlines in the newspaper when Soros broke the pound, the pushback against this evil short seller. We even saw it in the Irish property bubble in the early 2000s where you've got a professor of economics, an eminent professor coming on an Irish TV show predicting not only is the bubble going to pop, but it's going to bring down the Irish banking system with it. And the prime minister, he-

Richard Kramer:

Which was correct, which was entirely correct.

John Turner:

Yeah, which was totally correct. He had simply looked at the data. That's all he had done.

Will Page:

What professor?

John Turner:

So I don't know if I want to name, but okay, Morgan Kelly. So Morgan Kelly. So the Taoiseach or the prime minister of Ireland, Bertie Ahern at the time basically criticized him, I mean, he said, "I don't know why such people do go out and commit suicide." So that's the prime minister saying that, retracted that, but that's essentially anyone who's bearish. That's kind of then sort of the pushback that they're getting from vested interests, et cetera.

Richard Kramer:

And another thing I was really fascinated by in the book was how... And you talked about this with the Mississippi bubble a moment ago, how the entry ticket has come down. And that came in with partly paid shares and it reminded us on of one of our episodes we had dissecting Robinhood and predicting correctly its fall from Grace with fractional ownership of shares. Okay, Apple trades at $170 a share, but you can own 1% of a single share for half the price of a latte. Does this create sort of ever wider constituencies that act as some sort of self-reinforcing incentive to fuel the booms? Are you trying to persuade everyone as we did 18 months ago in the pandemic that sitting home with a gamified app, you can make millions of trading stocks on fractional ownership?

John Turner:

Yeah, so we call this the democratization of speculation because all of a sudden with part paid shares, you've got a share that's 10 pounds and you've got a scheme where you can pay up maybe a pound each month or whenever the company calls it up. And so this then opens speculation to the masses. And we see this particularly in what's called the railway mania that happened in the UK in the 1840s. But here's the thing that's actually makes it even more pernicious if you want that than Robinhood's idea of partial ownership. So these part paid shares not only increase the marketability of these shares, but there's also leverage built into it because you have to pay up that other nine pounds when it's called on your share. And so you can think of this almost like as buying on margin. And so then there's a lot of people have an interest in making sure that this keeps ongoing because they don't want to face those margin calls.

Will Page:

[inaudible 00:20:07].

John Turner:

Yeah. So part pay shares are almost akin to margin shares and they play this huge role in bubbles in the 19th century because of that.

Richard Kramer:

Well look, we've talked about marketability, which I think is a fascinating topic. We talked about the demonization of those who are on the bust side, not the boom, and now you've just given us a fantastic example of why everybody doesn't want the boom to end because they're going to be on the hook. With that, we're going to come back in part two. I know Will has many other obscure economic theories he'd like to test out on you. And we'll wrap up a bit more thinking about booms and busts before we ask you for some smoke signals with William Quinn and John Turner, authors of Boom And Bust. We'll be back in a moment.

Will Page:

Welcome back to part two of Bubble Trouble, where we're with William Quinn and John Turner, the authors of Boom Bust, a fantastic book, and also by profession economic historians. And before I hand over to Richard to go down to rabbit hole with you both, I wanted to ask a question about that discipline. When I studied university and I was doing economics, I remember taking a philosophy class and thinking, my God, if economic graduates don't study philosophy, it's like playing golf with one hand. You're missing the secret trick. If you haven't learned about Karl Popper, you really are missing the overall. How do you look at economic grads who haven't studied history? I'd just be very interested to know whether it's a concern of people spent three or in Scotland four years at university doing their economics degree, getting a first or two one, going into labor market, but not having an ounce of history to back up their degree. Is that a worry for you?

John Turner:

So this was a worry maybe 15 years ago. So after the financial crisis, people began to look at the training of economists and what they were actually studying at university. And one of the great holes that they found was that they weren't studying economic history. And so that's been remedied. So there's more economic history in syllabus, there could be a lot more, but there certainly is a cohort of graduates who've left now and they've got an appreciation of economic history.

Will Page:

Really pleased to hear that. So you have an inverse relationship with economic cycles. The more the markets go down, the more demand of history goes up. Richard, take it down the rabbit hole, sir,

Richard Kramer:

Yeah. Well, I want to get back to this issue of marketability and another great turn of phrase I really enjoy in the book, which is this prosperity chorus. And we talk a lot about sycophants and stenographers among analysts. The people who say congratulations on a great quarter and how should we think about the future growth you're going to enjoy? And the idea that if you talk up something enough, we all benefit, no one gets hurt. And so it's a giant consensual hallucination which maybe is irresistible for human nature, for politicians and hucksters. The question I have is, whose job is it to pump the brakes?

Who's on the bust side to say, let's make some warnings here? Because, again, we had many discussions on Bubble Trouble in the past and I'm sure in the future about the inequality that has stemmed from close to 15 years of zero interest rate policies now. And who should be pumping the brakes on this prosperity course? Who is in the background to say, I'm going to issue that warning that comes in Greek tragedy about midway through act two before the terrible ending of act three?

William Quinn:

Yes. So the prosperity course is applied to... This was John Brooks, another historian. He came up with this phrase to describe the group of extremely high profile bankers and financiers who were always being interviewed in 1929 about how great the economy was going to go. And really this was a selection effect. It wasn't that this was what everybody was thinking, it's that this is who the newspapers always wanted to talk to. And to some extent there was an access journalism problem. You could tell they didn't want to lose access to these people by saying something that they didn't agree with. These were the people who supposedly knew what they were talking about.

Richard Kramer:

Deja vu. Deja vu.

John Turner:

Yeah, yeah.

William Quinn:

Right, right. Also, Billy, to go back to the boy who cried wolf effect the fact that 1929 was after the greatest decade of economic growth [inaudible 00:24:15] history-

Richard Kramer:

Roaring prosperity, yeah.

William Quinn:

Right. So these were people who had been right for a very long time and that's why people were still listening to them. That doesn't mean that there weren't people trying to pump the brakes in the media. For example, Alexandra Noyes who worked for, I believe the New York Times, he would write quite frequently in 1929 about how this was not going to end. And this, to come back to Will's point was... Largely because he was a financial historian and had studied many episodes like this before and saw when things were starting to go too far. But pumping the breaks is difficult. You can be like that person in the second act of the Greek tragedy, he says the tragedy is coming, but that doesn't mean that they can stop the tragedy from coming.

Richard Kramer:

Before I hand back over to Will, I want to pick up on something else you wrote about in the book about these ancillary beneficiaries, the newspapers that sold more copies because first of all, they had headlines about how great the markets were. And second, because they printed columns of stock prices that used to be poured over by people and sold ads for stockbrokers against it. Is there any way to find more balance in this system when the forces behind the boom have such a great financial interest as we saw in so many boom bust cycle, with tech IPOs even in the last 20 years?

William Quinn:

Well, we do have a counter example, which is in the railway mania chapter where we talk about the Times and The Economist, these were two newspapers who called out the railway mania [inaudible 00:25:49] that said, we think this is a bubble. We think that prices are going to fall. This entire system is unsustainable. And what they got out of that was an excellent reputation for being truth tellers at a time when there wasn't a lot of this type of venal journalism where many newspapers were running average for railways and next to the list of shop stock prices and making their money that way. So there is a long-term incentive. There's a place on the market for being the people who really know what they're talking about and developing that long-term reputation. Sometimes someone comes along, some vulture capitalist comes along and buys out this newspaper and starts printing all of these puff pieces. And that reputation that they've spent centuries building is just completely gone. But there is value and a reputation still. And I think that's the hope in the news media it comes from.

Will Page:

So before I go into a discussion around quantitative easing, I wanted to go back to that point about selection criteria. You select which independent objective commentators you want on, therefore they're not that independent. We've had a lot of general elections in the United Kingdom of Great Britain, of England, Wales, Scotland, and Northern Ireland where you guys are based. Do you remember the one where David Cameron went up against Ed Miliband? Was that 2014, 2015? All the opinion polls said Ed Miliband by governing majority. And some said Ed Miliband [inaudible 00:27:13] with a bit of a coalition, and then David Cameron won with the governing majority on the first pass post systems. So I did some work on that about the opinion polls that were being published.

And what was going on was there was lots of opinion polls which were popping up with David Cameron with the government majority because they didn't agree with the consensus, the pollsters wouldn't publish them. Oh, just bury that one. I'll lose traction if I stand out from the crowd. I thought it's a bit of a digression, but it's not because it's a great way of showing how herd like behavior happens everywhere. Financial markets, pollsters. Really interesting one, mate. How now if David Cameron upset the polls? He didn't. You just didn't get to see the polls, which was saying that was going to happen.

William Quinn:

You remember that well, it's a textbook example of herding. One of the pollsters got... I pulled the dead before the election, which showed conservatives with I think a seven point majority whatever it was exactly the result that Kim threw. And if they'd put that into the model, they would've predicted the result exactly. But what they did was they looked at what all of the other pollsters were finding and said, no, this doesn't look right. And they threw that [inaudible 00:28:17].

John Turner:

They would be an outlier. Right.

William Quinn:

Exactly. And you know what happens in science when you throw away an outlier that you shouldn't throw away? You start to get biased results.

Richard Kramer:

You have another great example in the book, which I think is really cultural, which is you talk about Japan in the eighties, and there was that one famous point at which the land around the imperial palace in Tokyo was worth more than something like the entire US stock market. And you had seen incredible boom.

Will Page:

But McKinsey says the Metaverse is going to be worth more than the GDP of Japan. Let's just update your figure here, Richard.

Richard Kramer:

Yeah, yeah, of course. But there was a cultural bias to not wanting to embarrass the country and wanting to promote the country. So no one would stand up and say, these valuations are unsustainable because it would've been stepping out of the deferential mode of discourse. And you have a brilliant discussion of that, how no one wanted to be the little boy who tells the emperor literally he's stark naked.

William Quinn:

Now, I haven't been to Japan and I'm not Japanese. So I'd be slow to say these sort of wide-reaching things about Japanese culture. But what I can say about the Japanese bubble was that their businesses, the large businesses worked very closely together and they worked very closely together with the government. And not only did they work together, they also held lots of each other's shares. And this locked them into this mutually assured destruction situation where if you start selling the other company's shares, they're going to sell your shares and the whole thing is going to collapse. So it's another example of herding, but almost a kind of rational herding where the institutional structure prevents people from bursting the bubble at all.

Will Page:

I want to get into quantitative easing. I'm etching for this topic. Now, we had Michael McMahon from Oxford University, an Irish economist Give us a beautiful... When editors and newspapers have to sub-ed for a nine-year-old, that's often what they're told to do when they write about economics. He gave us a nine-year-old handholding guide to quantitative easing. So I've got a short question and a long question, a snapshot then a wacky idea for you. Short question, was quantitative easing a good thing all things considered, or was it a bad thing, a done thing, a necessary evil? Just give me the quick fire answer to, are you thumbs up or thumbs down on using QE?

John Turner:

Thumbs down. So in the conclusion of Boom And Bust, we really tackle sort of quantitative easing because this... So one side of our bubble triangle is of course the ease with which people can get credit, but also easy monetary conditions. And with quantitative easing, that's exactly what you have. You've got easy monetary conditions, you've got then people reaching for yield. So because they reach for yield, they're going into riskier assets and creates all sorts of problems for the economy. And it's interesting, QE really comes from Japan after their bubble crashed and after their banking system crashed. So QE was kind of like a way of trying to nurse the Japanese economy through the aftermath of its bubble.

And we've had QE since the global financial crisis trying to ease the economy, trying to nurse the economy, trying to nurse borrowers who are underwater, trying to nurse assets so that they can recover in value without causing destruction in the economy. Yeah, we're critical of them in the conclusion. And here's something else to throw into the mix, if we think of the UK in particular, over the past 15 years, we've had really low productivity growth and I don't think that's-

Will Page:

It's striking.

John Turner:

Yeah, yeah. It's really, yeah, yeah.

Richard Kramer:

Donuts.

John Turner:

Yeah, donuts.

Richard Kramer:

Bagels.

John Turner:

So what's the role here of quantitative easing? What's the role here of... We basically have got these zombie firms that are around. We've got no creative destruction taking place because of this policy of quantitative easing. So I think it has been disastrous. I think we'll look back in 20, 30 years time and say, what were we doing with this policy?

Richard Kramer:

Well, I think just to before I know, Will, you want to ask a sort of big macro question following on from that? But the work of Thomas Piketty will tell you that over the long run, that just exacerbates the inequality that's in society and creates massive structural problems. And we see this now with the cost of living crisis.

John Turner:

So one of the things quantitative easing does is it pushes up asset prices. And who holds assets? It's typically wealthy individuals. And of course, as soon as anyone tries to withdraw quantitative easing, we have the temper tantrums on the stock markets, financial markets.

Richard Kramer:

[inaudible 00:32:58] first, yeah.

John Turner:

And so the wealthy have benefited from this for sure.

Will Page:

Temper tantrums. You make it sound like these are boys with toys, which might actually be a pretty good description. Right. Here's my wacky idea. Forgive me why I take a stupid pill, stir it and a glass wine and brew and swig it back. I had this idea at four o'clock in the morning, if you're going to have quantitative easing in the financial economy or you need to have a balancing effect on the real economy, would you vote for William Douglas Page as prime minister? If I campaigned for an increase of quantitative easing of X percent should also be accompanied by an increase in the minimum wage by Y percent to tug that money through into the real economy so people feel a better, have I taken a stupid pill or is there some substance to that?

John Turner:

Well, we'd have to go to the opinion polls to see whether you could be elected.

Will Page:

Well, show me the polls are favorable, okay?

John Turner:

I get why you would think of a policy like that because of the wealth inequality that has occurred and that this policy of quantitative easing has exacerbated, but I'm not sure that's radical enough in the sense of the minimum wage affects.

Will Page:

Transfer my vote to you.

John Turner:

Yeah. Yeah. So the minimum wage affects a small number of people in reality. So you'd need something a lot more aggressive to change people's lives. So something like a guaranteed income type of scheme would be something that might be a bit more palatable to the voters as well, I think.

Will Page:

Okay.

Richard Kramer:

Before we get to smoke signals, I got to ask, you've written a book called Boom And Bust. What were you guys thinking during the last 18, 24 months of Web3 and NFTs and how do you look at crypto? Is that your next book, maybe? I don't want to out front run it here, but is this a fight the power exercise to undermine the hegemony of central banks? Or is it a very clever tool for criminals to transact without leaving a trace with valuations, lacking any reference to underlying assets or revenue streams? Which side of that crypto red pill, blue pill side do you go down on and is this going to be the topic of Boom And Bust, the sequel?

William Quinn:

I have actually thought about it, writing a book about the crypto bubble specifically. I don't know if I ever will. You actually made a very sharp description there, a tool for criminals to transact with. This is the core of crypto. It's very useful. Some people think it's not useful, but it is very useful for breaking the law. It's not very useful for anything else. I remember when I first discovered Bitcoin, everyone understood this Bitcoin was the money you used to buy drugs on the internet, nothing else. And over time people got excited about it and turned it into a more widespread currency that's going to take over the world or an investment asset that everyone should hold in their portfolio or the next get rich quick scheme. And we got a bubble. And I feel like after that bubble, the hype cycle just started moving around.

So whenever Bitcoin first started to fall in 2017, it moved into blockchain technology and you would convince people to start investing in your crazy blockchain startup that didn't do anything useful. Then it moved into Web3, another buzzword, venture capitalists for pouring lots of money into this and then bringing these companies to market that essentially didn't do very much. You had NFTs, which again, just the next following from that, and then more recently you have the Metaverse. But to me it just looks like all of this money moving around that isn't having any real positive economic impact outside of the criminal economy, which is a mix of things that are bad, that everyone knows are bad and things that maybe they shouldn't be illegal. Maybe there's some very defensible reason why it's a good idea to break the law here. Examples like using it to get dissident money out of Russia, for example, is just a very defensible type of use case. But well, the key innovation is breaking the law.

Richard Kramer:

I think after drugs you've found extortion, arm smuggling and people trafficking we're all valid use cases as well for Bitcoin. But so I think we've got to, in the interest of time, move to our smoke signals. And since this is the first time we've had two guests on, we're going to ask each of you for one of them, and these are these sort of uh-oh moments during the hype and hysteria bubble trouble during the booms, before the bust where you overhear terminology or metaphors or things that just make you go and give you that eerie sense of deja vu, harking back to the British bicycle or the Australian land or the Japanese financial bubble crisis you guys have so eloquently described in your book. What sort of terminology gives you that face-palm moment when people are saying, oh, this time it's different?

John Turner:

So it's not necessarily what people say. It's who's saying it to me. So I've been around long enough to have taught MBA students back in the spring of 2000, and they were all telling me about the latest internet stocks that I should be buying. I was in Shenzhen in May 2015, meeting alumni from our university, and they were all telling me about the latest tax stocks coming in Shenzhen. And through my translator, the taxi driver in Shenzhen was also telling me about the stocks that he was investing in. And then when my brother who knows nothing about investment is telling me about all the cryptocurrencies that he is holding, that's when I get worried. So it's not what people say, it's who's saying it to me.

Richard Kramer:

It's like in the nineties, I remember the famous apocryphal stories of your dentist talking to you about optical networking stocks.

John Turner:

Yeah, yeah.

Richard Kramer:

Which one you should buy that has the best play on internet bandwidth?

William Quinn:

Yeah, so I remember a specific article I read at the peak of blockchain hype by the MIT Blockchain Labs, very prestigious institution about our blockchain was going to change the world, and they had two pieces of evidence for why blockchain was going to change the world. One was that lots of very smart people were saying it was going to change the world. And two was that lots and lots of money was being invested in it. They didn't say anything about how it was going to change the world, what the technology actually did, didn't go into any detail about how or why it might be useful. It was just everyone else is doing it and look at all the money that people are making. And that was when I thought this is definitely a bubble.

Richard Kramer:

In a sexy way about blockchain, you just reply... So you mean distributed ledger technology, which just sounds completely un-sexy as an accounting term,

William Quinn:

Or you could say a shared Excel spreadsheet.

Richard Kramer:

Yes. Oh dear, that's even less sexy. So we've gone from Boom And Bust the global history of financial bubbles through the sexiness of Excel spreadsheets and Will Page's red pill ideas for what central bankers might or might not do, which John, you did an admirable job of amending to something a little bit more reasonable. I want to thank our guests, William Quinn and John Turner, authors of Boom And Bust. We can definitely recommend the book to all the economists who are studying but neglecting their history. This has been another episode of Bubble Trouble and on behalf of Will Page, thank you very much for listening.

Will Page:

If you're new to Bubble Trouble, we hope you'll follow the show wherever you listen to podcasts. And please share it on your socials. Bubble Trouble is produced by Eric Newsome, Jesse Baker, and Julia Net at Magnificent Noise. You can learn more at bubbletroublepodcast.com. Until next time, from my co-host Richard Kramer, I'm Will Page.