from the world's big
Dissecting the Bubbles
Dr. Vernon L. Smith was awarded the Nobel Prize in Economic Sciences in 2002 for his groundbreaking work in experimental economics. Dr. Smith has joint appointments with the Argyros School of Business & Economics and the School of Law, and he is part of a team that will create and run the new Economic Science Institute at Chapman.
Question: What are your findings about asset market bubbles?
Vernon Smith: Money is a problem both in the world and in the asset trading markets in the laboratory. Now of course asset market bubbles are much older. They started centuries ago in the economy. We didn’t get around to doing any experiments on them until you know the early 1980s and one of the things that was so amazing about these experiments is that we thought we were creating an environment where it would be transparent what the fundamental value was and that people would trade at that fundamental value and far from being based on asymmetric information in these experiments everyone had the same information and they had complete information and in spite of this we got the bubbles and that surprised us. At first we thought there was something wrong with the experiments and but it turned out that they replicated very easily and not only with undergraduate subjects, but also business people and at one time in frustration we went into Chicago and recruited some over the counter traders in the stock market and we put them in an experiment and they gave us a nice bubble. So these are very robust and money is at the core of both bubbles in the field and bubbles in the laboratory. And in fact we did see in an asset market trading experiment we give people endowments of cash and shares and then tell them what the dividend range is, the dividend distribution, the realizations at the end of each period and in terms of the dividend draws and this is what determines the fundamental value or holding value of the shares and you can do an experiment where you’d give group A say subjects given endowments of shares and cash and then group B you can give them twice of three times as much cash, but the same endowments of shares and you’ll get a much larger bubble in the second case even though there is nothing changed about the fundamental value of the shares. So the laboratory results make it very clear that it’s cash flopping around in the system that tends to give you these runaway asset market bubbles.
Question: You go on to note that historically most bubbles do not bring down the entire economy when they pop. What happened this time?
Vernon Smith: I think of the housing bubble as the asset bubble that blindsided the economy. If you look at bubbles in stock markets they do not cause general problems in the economy. We had the dot com stock bubble that ran all through the nineties and peeked out in 2000 and crashed and you had about 10 trillion dollars loss in asset market value as a result of that stock market bubble and it had a minor affect, small affect on the banking system and the economy generally. On the other hand, if you look at 2001 when we lost about three trillion dollars in value in the housing market it devastated the banking system and the reason for this is really I think quite clear. In the stock market going clear back to the late 1920s we have always had brokers themselves require margins when you buy stocks. If you go back even to the late 1920s brokers were requiring 45 and 50 percent margin requirements when you bought securities and in the case of risky stocks they would require as much as 70 or 75 percent margin requirements and what that means is that you simply cannot buy stocks on margin the way you can buy homes or you could buy homes on margin with very low down payments. Even with loans in the stock market you have to keep in mind that those are essentially call loans. Now what that means is if you have a 50% margin requirement if you buy securities, meaning you have to put half the cash, if those stocks that you buy decline in price and the total value of your portfolio becomes less than 50% of the stocks that you borrowed on your broker will simply sell some of your shares in order to cover that loss and you can’t even prevent that. You sign a contract that gives him that right if you are a margin buyer. And so what that means is that bubbles in the stock market if there is a problem the problem is borne by the investors in the market. On the other hand if you have people buying houses with very low or zero down payments and the prices of homes starts to decline right away those homes, those loans that the banks have made are underwater, the banks start then to get into trouble. They have a balance sheet problem and as soon as the banks are in trouble it puts all kinds of people into difficulty that may have had nothing to do or they may not have had anything to do with what was going on in the stock market. So if the banks are under pressure and not making loans all sorts of people may be hurt and they may not even be homeowners. They rent and they haven’t been contributing to the problems, but they nevertheless may suffer. So there is a big difference here between asset market bubbles where people are required to collateralize all of their borrowing and cases as in the housing market where they’re inadequately collateralized and so there is no cushion, no nothing to protect sort of the systemic risk in the banking system if those asset prices decline.
Question: How has the government response to the crisis impacted household incomes, housing policies, and tax changes?
Vernon Smith: Larry Summers, who is the chief economic advisor to President Obama, gave a speech to the Brookings Institute last March in which he referred to the paradox we now had in financial markets. He said in the last few years we’ve had the problem that there has been too much greed and not enough fear, to little saving and too much spending and too much borrowing and he said that our problem now is the opposite. In other words there wasn’t enough borrowing. There wasn’t enough spending. There was too much savings. And of course what the administration is doing is the same thing any administration would do in this crisis and that is to try to prevent the price of homes from falling, so they’re shoring up the demand for homes by more subsidies. Now if you think about that you realize that the proposed solution now is exactly what the problem was, so the solution is the problem, more of the same and the question is how do you get out of this sort of vicious circle and I think what’s important is that you try not to get there in the first place because you once you’re in this kind of a downturn all of the political pressures are to further artificially expand the demand for homes and to shore up those prices even though what we really need is for those prices to come down relative to the prices of other things in the economy because they’ve been blown up; they’ve grown all out of proportion. Home prices are way out of proportion to increase of other prices in the economy and this was entirely due to funny money to basically home financing through credit much in excess of the kind of home buying that would normally occur out of income. See normally we spend about… Developed countries people spend about 30 percent of their income on housing and when you have prices doubling and tripling in a matter of 10 or 15 years it means that those prices are way out of proportion to the ordinary ability to finance them and something is going to have to give. These prices are going to have to or that credit bubble will have to go through an adjustment.
Recorded on December 17, 2009
Economist Vernon Smith has said that most bubbles do not bring down the entire economy when they pop. So what happened this time?
An article in Journal of Bioethical Inquiry raises questions about the goal of these advocacy groups.
- Two-thirds of American consumer advocacy groups are funded by pharmaceutical companies.
- The authors of an article in Journal of Bioethical Inquiry say this compromises their advocacy.
- Groups like the National Alliance on Mental Illness act more like lobbyists than patient advocates.
The Corruption That Brought Prozac to Market — Robert Whitaker, Journalist<span style="display:block;position:relative;padding-top:56.25%;" class="rm-shortcode" data-rm-shortcode-id="bea9cff2b25efc18b663a011a679ba16"><iframe type="lazy-iframe" data-runner-src="https://www.youtube.com/embed/UyaJExxFPAE?rel=0" width="100%" height="auto" frameborder="0" scrolling="no" style="position:absolute;top:0;left:0;width:100%;height:100%;"></iframe></span><p>Consumer-oriented groups gained steam over the ensuing decades. Their efforts helped inspire the 1938 Food, Drug, and Cosmetic Act after over 100 people (mostly children) died from a sanctioned drug, Sulfanilamide. If not for the hard work of these advocates, this case might have been overlooked.</p><p>Early efforts also focused on the food industry, which was increasingly using chemical preservatives. The origin of Consumer Reports can be found in the consumer advocacy movement. Both the food and drug industries were getting a free pass to experiment on citizens with few repercussions.</p><p>These movements provided a social foundation for important advocacy work in the second half of the century. Female-led groups evolved to focus on women's reproductive rights, AIDS, and mental health. As the authors write, these groups struck a balance between working <em>with</em> and <em>against</em> current trends. Sometimes you need to craft legislation with officials; at other times, you have to rage against the machine with everything you've got. </p><p>Advocacy marked an important turning point in public health (and culture in general). These groups were tired of placating to a medical model that treated the male body as the standard. This wasn't limited to anatomy. As I <a href="https://bigthink.com/coronavirus/pandemic-warnings-rp-eddy" target="_self">wrote about last week</a>, a high-profile 1970s-era conference about the role of women on Wall St featured no women on stage. You can imagine what reproductive health looked like during that time. </p><p>Advocacy groups made real impact in public health. Then the money began pouring in. </p><p style="margin-left: 20px;">"These groups were funded largely by individual donations with some foundation support, but in the late 1980s, newer women's health groups moved to professionalize, effectively splitting the women's health movement."</p><p>A number of groups resist corporate ties to this day, such as the National Women's Heath Network and Breast Cancer Action. Too often, however, groups argue that their existence depends on corporate funding. This can lead to uncomfortable compromises. </p><p>An estimated two-thirds of patient advocacy groups in America accept funds from the pharmaceutical industry. Pharma companies gave <a href="https://link.springer.com/content/pdf/10.1007/s11673-019-09956-8.pdf" target="_blank">at least $116 million</a> to such groups in 2015 alone.</p><p>For example, over a three-year period, the National Alliance on Mental Illness (NAMI), which was founded by two mothers whose sons suffered from schizophrenia, received nearly $12 million from 18 pharmaceutical companies. The largest donor was Prozac manufacturer, Eli Lilly. By 2008, three-quarters of NAMI's budget was funded by the pharmaceutical industry. It gets worse:</p><p style="margin-left: 20px;">"An Eli Lilly executive was even 'on loan' to NAMI, paid by Eli Lilly, while he worked out of the NAMI office on 'strategic planning.'"</p>
A customer waiting for his medication at the Headache Bar in a pharmacy in Sydney, Australia. Among the items on sale are 'Paigees with Chlorophyll' and Alka Seltzer on tap.
Photo by Dennis Rowe/BIPs/Getty Images<p>This influx of cash skews public understanding of drugs. It also influences advocates to overlook real problems caused by pharmaceutical interventions, especially when it comes to mental health.<br></p><p>For a real-world example, consider how Xanax came to market. As journalist Robert Whitaker <a href="https://www.youtube.com/watch?v=2e829xdb4AA" target="_blank">explains</a>, an <a href="https://www.ncbi.nlm.nih.gov/pmc/articles/PMC1463502/?page=1" target="_blank">initial study</a> was conducted to determine efficacy in treating panic attacks. After four weeks, Xanax was outperforming placebo, which is common with benzodiazepines over short-term usage. But it wasn't a four-week study; it was a 14-week study.</p><p>At the end of eight weeks, there was no difference in efficacy between Xanax and placebo.</p><p>At the conclusion of the study after 14 weeks, the placebo outperformed Xanax. By a lot.</p><p>Why is Xanax still prescribed for panic attacks? Because the pharmaceutical company, Upjohn, only published the four-week data. The 14-week data was not in its favor. Nearly forty years later, over <a href="https://www.statista.com/statistics/781816/alprazolam-sodium-prescriptions-number-in-the-us/" target="_blank">25 million</a> Americans receive a prescription despite its <a href="https://drugabuse.com/xanax/effects-use/" target="_blank">long list</a> of side effects and addictive profile. </p><p>As the authors note, many consumers are not aware of how advocacy groups are funded.</p><p style="margin-left: 20px;">"An international study of groups in the United States, United Kingdom, Australia, Canada, and South Africa found that the extent of relationships with industry was inadequately disclosed in websites that addressed ten health conditions: cancer, heart disease, diabetes, asthma, cystic fibrosis, epilepsy, depression, Parkinson's disease, osteoporosis, and rheumatoid arthritis."</p><p>That's a tangled web of relationships. Pharmaceutical industry funding negatively impacts the work advocacy groups should be focused on: protecting us. NAMI, for example, claims that as a "natural ally" to the pharmaceutical industry, it helps consumers access "all scientifically proven treatments." When the industry ignores evidence of long-term damage caused by its treatments, you have to wonder what's being advocated. </p><p>Although, as the authors conclude, that question is easy to answer. </p><p style="margin-left: 20px;">"Instead of drawing insights from patient experience to set organizational agendas and challenge industry agendas, today's groups are silent on high prices and drug harms, oppose efforts to regulate these basic rights, and demand access to drugs that challenge the safety and effectiveness."</p><p><span></span>--</p><p><em>Stay in touch with Derek on <a href="http://www.twitter.com/derekberes" target="_blank">Twitter</a>, <a href="https://www.facebook.com/DerekBeresdotcom" target="_blank">Facebook</a> and <a href="https://derekberes.substack.com/" target="_blank">Substack</a>. His next book is</em> "<em>Hero's Dose: The Case For Psychedelics in Ritual and Therapy."</em></p>
- Modern antibiotics can effectively treat bubonic plague, which spreads mainly by fleas.
Bacteria under microscope
needpix.com<p>Today, bubonic plague can be treated effectively with antibiotics.</p><p style="margin-left: 20px;">"Unlike in the 14th century, we now have an understanding of how this disease is transmitted," Dr. Shanthi Kappagoda, an infectious disease physician at Stanford Health Care, told <a href="https://www.healthline.com/health-news/seriously-dont-worry-about-the-plague#Heres-how-the-plague-spreads" target="_blank">Healthline</a>. "We know how to prevent it — avoid handling sick or dead animals in areas where there is transmission. We are also able to treat patients who are infected with effective antibiotics, and can give antibiotics to people who may have been exposed to the bacteria [and] prevent them [from] getting sick."</p>
This plague patient is displaying a swollen, ruptured inguinal lymph node, or buboe.
Centers for Disease Control and Prevention<p>Still, hundreds of people develop bubonic plague every year. In the U.S., a handful of cases occur annually, particularly in New Mexico, Arizona and Colorado, <a href="https://www.cdc.gov/plague/faq/index.html" target="_blank">where habitats allow the bacteria to spread more easily among wild rodent populations</a>. But these cases are very rare, mainly because you need to be in close contact with rodents in order to get infected. And though plague can spread from human to human, this <a href="https://www.healthline.com/health-news/seriously-dont-worry-about-the-plague#Heres-how-the-plague-spreads" target="_blank">only occurs with pneumonic plague</a>, and transmission is also rare.</p>
A new swine flu in China<p>Last week, researchers in China also reported another public health concern: a new virus that has "all the essential hallmarks" of a pandemic virus.<br></p><p>In a paper published in the <a href="https://www.pnas.org/content/early/2020/06/23/1921186117" target="_blank">Proceedings of the National Academy of Sciences</a>, researchers say the virus was discovered in pigs in China, and it descended from the H1N1 virus, commonly called "swine flu." That virus was able to transmit from human to human, and it killed an estimated 151,700 to 575,400 people worldwide from 2009 to 2010, according to the Centers for Disease Control and Prevention.</p>There's no evidence showing that the new virus can spread from person to person. But the researchers did find that 10 percent of swine workers had been infected by the virus, called G4 reassortant EA H1N1. This level of infectivity raises concerns, because it "greatly enhances the opportunity for virus adaptation in humans and raises concerns for the possible generation of pandemic viruses," the researchers wrote.
Want help raising your kids? Spend more time at church, says new study.
- Religious people tend to have more children than secular people, but why remains unknown.
- Conversely, having a large secular social group made women less likely to have children.