QuoteOriginally posted by: Traden4AlphaThe only difference between the two bubble types is whether banks are holding the bubble asset on their books. Stock market and commodity bubbles don't cause as much structural damage because most depository institutions aren't heavily invested in equities or commodities. In contrast, real estate bubbles (and other credit-fueled bubbles) are much more dangerous in Western economies because so many depository institutions hold significant assets tied to property values. It doesn't help when people (including politicians and regulators) become convinced that property prices can ever go down so that downpayments drops and banks end up with de facto equity positions in real estate. The point is that all bubbles are 'malignant tumors'. The key damage-modulating variable is whether the tumor consumes risk capital (e.g., people's speculative investments) or risk-free capital (e.g., people's "safe" debt investments).Don't want to sound like patronizing but you need to think more here. For example, Spanish banks are still healthiest in Europe. (Irish ones are very sick but I read they have lots of risky assets.)With regard to US, try to analyze all chain of actions in the US bubble creation and its consecutive burst. (Something like I did before when analyzed the fake Moon landing.) Don't be such defensive and be open-minded (as our friend Fermion previously suggested). I have no desire to chew everything for you anymore as I did before explaining you idea of "monetary policy" by Greenspan (or the Japanese situation).QuoteOriginally posted by: Traden4AlphaI disagree about Japan, which had the mother of all credit-fueled bubbles in real estate (prices reached $1,000,000/sq meter in Tokyo's Ginza district). A transient decline in income may have popped the bubble (note that Japanese GDP never did drop significantly), but it did not create the asset price bubble. High-end Japanese property lost more than 99% of its value and Tokyo residential property lost 90% of its value.You can agree or disagree but you got it completely wrong IMHO. Decline in GDP growth caused the RE prices to drop significantly (in other words, caused the bubble to burst).

I'm coming to this thread at a rather late stage, so I don't know what the latest topic here actually is, but as a veteran front office guy I find it hard to resist smiling when some some b-school or econ ingenue (not claiming any of you are, btw) spouts off this efficient markets nonsense. Look, ask yourself how many firms are (were?) big players in the credit derivatives market (or any commodity market, or practically whatever financial market you can name)? You'll generally find a handful of firms doing the lions share of the business. At the opposite end of reality is the perfect competition model, which is a limiting result with an infinite number of competitors. You can see where I'm going here. Leave the mad professors at the University of Chicago to chant the mantra of competition and efficient markets, there's not much of that here on the ground level. What does this mean? If, as I firmly believe (and profit by, thank you very much), financial markets are not competitive, governments should tax the living sh*t out of the financial companies. This would solve two big picture problems: 1) taking away the excess profits and 2) simultaneously dealing with the agency incentive problem that clearly spurred financial execs to take on highly levered bets. If the huge profits are taxed away then the big bonuses will be a thing of the past. Before you start typing your repy that I'm a commie, please take a deep breath first and go back and look at what your econ 101 textbook has to say about perfect competition - it rarely happens on this planet. And of course I realize that my "big idea" would be problematic in reality because some jurisdiction will always want to not play along so as to lure the business into its borders. It would be a lot to ask so many politicians to agree on anything.

QuoteFor example, Spanish banks are still healthiest in Europe. (Irish ones are very sick but I read they have lots of risky assets.)This thread in 2006 discussed the housing market in these countries. It was obvious how things were moving and act on them .. Quote--------------------------------------------------------------------------------A lot more people own homes than own shares. In all the big developed economies bar Germany, well over half of all households are home-owners (see chart 2). In most of Europe and Australia, housing accounts for 40-60% of total household wealth, and in America for about 30%. And even in America the typical household on an average income holds six times as much wealth in residential property as in shares.--------------------------------------------------------------------------------Quote--------------------------------------------------------------------------------"Over the past half century, the increase in the value of raw materials has accounted for only a fraction of the overall growth of U.S. gross domestic product. The rest of that growth reflects the embodiment of ideas in products and services that consumers value. This shift of emphasis from physical materials to ideas as the core of value creation appears to have accelerated in recent decades." -Alan Greenspan, Chairman of the Federal Reserve, February 27, 2004 --------------------------------------------------------------------------------

What I find fascinating is that large parts of the profits are being paid out to employees, without the shareholders stepping in. As opposed to other industries people with good investment strategies can switch firms easily. Without prop trading profits should be much smaller. Many activities are a disservice to the market system. For example many M&A transactions only generate more money / power for managers and investmentbankers, rather than generating value for other stakeholders (shareholders, employees, customers, suppliers, ...).

torontosimpleguy,In Spain, the bigger banks seem to be healthy (many due to thriving business in Latin America that dilutes domestic losses) but the smaller local cajas are in deep trouble. This is exactly analogous to the U.S Savings & Loan crisis circa 1990 in which 1043 local thrifts went bust on bad real estate loans during a much smaller real estate bubble. Both Spain and Ireland are facing economic problems from the crash of the real estate boom (which was funded by the banks) -- both economies had an extremely high percentage of GDP in construction that has now all but disappeared.I suspect we somewhat agree on the phenomena that afflicted Japan. I agree that a decrease in GDP growth popped the bubble, but it didn't create the bubble (which was a real estate bubble fueled by excess capital and credit). Nor did this the slowing of the GDP growth create all the structure damage seen during Japan's lost decade (approximately $15 trillion in lost wealth).

QuoteOriginally posted by: DavidJNI'm coming to this thread at a rather late stage, so I don't know what the latest topic here actually is, but as a veteran front office guy I find it hard to resist smiling when some some b-school or econ ingenue (not claiming any of you are, btw) spouts off this efficient markets nonsense. Look, ask yourself how many firms are (were?) big players in the credit derivatives market (or any commodity market, or practically whatever financial market you can name)? You'll generally find a handful of firms doing the lions share of the business. At the opposite end of reality is the perfect competition model, which is a limiting result with an infinite number of competitors. You can see where I'm going here. Leave the mad professors at the University of Chicago to chant the mantra of competition and efficient markets, there's not much of that here on the ground level. What does this mean? If, as I firmly believe (and profit by, thank you very much), financial markets are not competitive, governments should tax the living sh*t out of the financial companies. This would solve two big picture problems: 1) taking away the excess profits and 2) simultaneously dealing with the agency incentive problem that clearly spurred financial execs to take on highly levered bets. If the huge profits are taxed away then the big bonuses will be a thing of the past. Before you start typing your repy that I'm a commie, please take a deep breath first and go back and look at what your econ 101 textbook has to say about perfect competition - it rarely happens on this planet. And of course I realize that my "big idea" would be problematic in reality because some jurisdiction will always want to not play along so as to lure the business into its borders. It would be a lot to ask so many politicians to agree on anything.First, I don't know that anyone is claiming "perfect competition" in the financial industry. We're only trying to estimate the % of sector profits that are true "excess" and the sources of those "excess" profits (e.g cartel behavior, skew returns, supply/demand imbalances, etc.). Second, I doubt that taxing the living sh*t out of the financial companies would be the optimal response for two of the three sources of excess profits that I've listed. First, if financial companies are generating profits via cartels (H1), then increasing their taxes will only increase the pressure to maintain the cartel. Moreover, the taxes would hardly be directly transfered from the cartel to those most harmed by cartel behavior (i.e., would-be new competitors, and consumers of financial services). Large consumers of financial services (i.e., those with large household balance sheets such as big equity accounts, big pensions, and big mortgages on big houses) aren't likely to receive wealth transfer payments from the government. Thus, taxing the industry simply becomes a way for the government to make excessive profits on the sector's excessive profits (and creates financial incentives for the government to preserve the cartel system). Second, if profits are high because growing demand for financial services truly exceeds the growth of supply of the services (H3), then high taxes will only stifle supply growth and enable further price escalation. The solution to a shortage of supply isn't taxes on supply. Third, only in the case of skewed returns (H2), might high taxes be useful both in terms of reducing the incentives to generate excessive profits (assuming the taxes target profits and not revenues or assets) and in terms of collecting money to cover future systemic risks. That is, the taxes become de facto insurance premiums paid to support bailouts of the industry when it crashes.P.S., I'm the wrong gender to be an econ ingenue but will readily admit that I'm an econ amateur.

QuoteOriginally posted by: DavidJNI'm coming to this thread at a rather late stage, so I don't know what the latest topic here actually is, but as a veteran front office guy I find it hard to resist smiling when some some b-school or econ ingenue (not claiming any of you are, btw) spouts off this efficient markets nonsense. Look, ask yourself how many firms are (were?) big players in the credit derivatives market (or any commodity market, or practically whatever financial market you can name)? You'll generally find a handful of firms doing the lions share of the business. At the opposite end of reality is the perfect competition model, which is a limiting result with an infinite number of competitors. You can see where I'm going here. Leave the mad professors at the University of Chicago to chant the mantra of competition and efficient markets, there's not much of that here on the ground level. What does this mean? If, as I firmly believe (and profit by, thank you very much), financial markets are not competitive, governments should tax the living sh*t out of the financial companies. This would solve two big picture problems: 1) taking away the excess profits and 2) simultaneously dealing with the agency incentive problem that clearly spurred financial execs to take on highly levered bets. If the huge profits are taxed away then the big bonuses will be a thing of the past. Before you start typing your repy that I'm a commie, please take a deep breath first and go back and look at what your econ 101 textbook has to say about perfect competition - it rarely happens on this planet. And of course I realize that my "big idea" would be problematic in reality because some jurisdiction will always want to not play along so as to lure the business into its borders. It would be a lot to ask so many politicians to agree on anything.There are excessive profits in banking? hmm...

If you are a shareholder, perhaps not. But there may have been excess profits for bankers...

This article suggests excessive profits-http://www.telegraph.co.uk/finance/news ... train.html

QuoteOriginally posted by: RamseyThis article suggests excessive profits-http://www.telegraph.co.uk/finance/news ... htmlIndeed, so. The article seems to suggest a supply-demand imbalance at both the level of the underwriter and sub-underwriter level (the H3 cause) and that competitive forces are likely to cut the banks from the future deals.